Cape Gazette joins suit against SEC gag rule

The Cape Gazette has teamed up with a former Rehoboth Beach financial advisor, the New Civil Liberties Alliance, and nine others in a court appeal to end a federal gag rule.

In action filed in the U.S. Court of Appeals for the Ninth Circuit, petitioners contend a Securities and Exchange Commission rule that sets a no-admit-no-deny policy for all settlements violates the First Amendment protecting free speech, and also violates the Administrative Procedure Act. The rule effectively silences anyone signing a settlement from denying wrongdoing or even creating an impression of denial.

Five years ago, the NCLA said it petitioned the SEC requesting a rule change, but received no response. The alliance refiled in late 2023, and their request was officially shot down by the SEC in January.

“Petitioners seek review of the order because it is arbitrary and capricious, an abuse of discretion, and contrary to law in violation of the Administrative Procedure Act,” the three-page petition states. “By refusing to engage in rule making to eliminate the speech suppressing provisions of the gag rule, while simultaneously silencing or threatening to silence the individual petitioners, among thousands of others, and stopping press petitioners from accessing individual petitioners’ speech, the commission disregards the First Amendment and the APA.”

The SEC declined to comment on the gag rule denial or the pending Ninth Circuit Court appeal.

Cassandra Toroian, a former registered investment advisor and owner of Bell Rock Financial in Rehoboth Beach, signed on as a petitioner over an SEC gag rule she now lives under – the result of a 2022 SEC accusation that she cherry-picked stocks to benefit her and her family while posting losses for other investors. In an interview shortly after the SEC allegation, Toroian pointed out that the SEC took a single day of trading to reach its conclusion instead of looking at long-term performance. 

At the time, she vowed to fight the SEC with a team of lawyers from Philadelphia and Washington, D.C. “I can fight and shed light on this, because they do this kind of thing all the time,” Toroian said. “No one oversees and holds them accountable, and as the years have gone on, it’s gotten worse and worse,” Toroian said in a 2022 Cape Gazette interview.

Less than two years later, she took a settlement. 

Toroian signed a consent order and final judgment in 2023, which barred her from working in the securities industry. That same year, she sold Bell Rock – a firm she founded in 2006, eventually serving up to 200 clients and managing as much as $220 million in assets – to Bryn Mawr Capital Management.

But this time, she wasn’t allowed to talk about it.

In an April 24 discussion hosted by NCLA, Toroian said at first she considered settling with the SEC but declined after reading the terms that included a gag order.

“What I read in the complaint I felt I couldn’t swear on a Bible. So at the last minute I said, no, I’m sorry, I can’t do this,” she said.

That decision cost her a $220,000 fine and more than $2 million in legal fees.

Toroian said she settled in order to get on with her life, but it came at a cost.

“I said to my lawyers, ‘So, I can pay this money, agree to have no license anymore, hand them a bunch of money, and for that I get the pleasure of never having my voice again,’” she said.

Her forced silence on the matter isn’t the only consequence of the settlement. Toroian said she has suffered from a bank cancel culture that forced her to change banks, and also change custodians of her investment accounts.

“Despite the fact that I say there’s a settlement out there, you can read it, this is all done, I can’t say any more than that. When you’re accused of fraud, and you have no speech left to give to explain anything, it’s very frustrating,” she said.

Toroian said other investors have contacted her for advice after searching the internet and finding the one and only article where she was quoted.

“They have no idea what’s in store for them,” she said.

Toroian said she appreciated the opportunity to talk to the Cape Gazette in 2022 before her SEC settlement silenced her. 

“Thank God that I didn’t listen to my lawyers, and I let [the Cape Gazette] come to my office and interview me. I had no idea that was going to basically be the last and only time potentially in my entire life that I had a voice in any of what had happened to me. I at least could get out there a bit and express my anger and frustration and the emotional turmoil the whole thing had taken on me,” she said. 

SEC settlements in the thousands

In its January letter denying the NCLA’s rule change request, the SEC explains that it was granted authority by Congress to conduct investigations into potential violations of securities laws, and for nearly a century has had enforcement powers to bring cases to federal court.

Since then, thousands of people accused of wrongdoing have been offered a settlement as part of the SEC’s no-admit, no-deny policy.

“Generally, the defendant states that, without admitting or denying the allegations of the complaint … consents to the entry of a judgment and accepts the agreed-upon sanctions,” the SEC letter states. “The defendant further agrees to comply with Rule 202.5(e) and not to make any public statements denying the allegations in the complaint.”

If a defendant publicly denies, the penalties are severe. The SEC can take them back to court to vacate the settlement and reopen action against them. Fighting the SEC is a daunting task that can cost millions in legal fees and take years to resolve.

For Thomas Powell, time was the biggest reason why he settled.

“My family was sitting there going like we don’t want six more years. The money was one thing, the time was another,” he said during the NCLA discussion.

Now a senior advisor at Brehon Strategies, Powell said he had already spent $6 million over four years fighting the SEC when his attorneys told him that it would take at least another six years and about $10 million more if he wanted to take the case to the U.S. Supreme Court.

He said he agreed to a $75,000 fine, which would have allowed him to still work with investments, but the terms were pulled back with an administration change in 2020.

And along with signing a no-admit-no-deny settlement, Powell said the signed agreement stipulated it was done without coercion.

“There was nothing but extortion and coercion throughout this,” he said. “It sounds like when we used to get forced confessions.”

Powell also points out that small businesses are penalized far more than the larger financial institutions backed by publicly traded stock. “When you look at the list … it’s small, individual business people,” Powell said.

Toroian noted that the SEC annually reports to Congress its fiscal contributions to the U.S. Treasury, and every year that number gets bigger and bigger.

NCLA’s petition for changing the SEC gag rule is the latest of several that have challenged the SEC, but have failed.

In the SEC letter denying the rule change, it states, “While couched as a modest change … the proposed amendment would, in effect, eliminate the policy because it would allow defendants to consent to a judgment while denying the allegations with no recourse for the commission to return to active litigation.”

As for the NCLA’s charge that SEC settlement rules violate the First Amendment, the SEC refers to precedent that it says confirms a defendant can waive constitutional rights as part of a civil settlement, noting a case decided by the Second Circuit Court which explained “parties can waive their First Amendment rights in consent decrees and other settlements of judicial proceedings.”

Ruling by regulation

Peggy Little of the NCLA said the SEC and the Commodity Futures Trading Commission are the only two agencies in the U.S. allowed to impose the gag rule, which showed up in the Federal Register one day with no process that allowed public comment. The no-admit-no-deny SEC settlement policy has been in effect for more than 50 years.

“It’s illegitimate at its birth,” she said. “Any lawyer will tell you that a rule that imposes and binds a gag on people has to go through notice and comment.

“Every other agency, state or federal, in the United States, seems to be able to robustly regulate Americans without gagging them. It is such an odd thing for people to be able to do this for 50 years. It’s astonishing, and it must stop,” Little said.

For Toroian, rule by regulation is shocking and goes against everything the United States stands for.

“I had no idea that we have this thing called the regulatory government,” she said.

As the daughter of a first-generation American, Toroian said she is fighting for her family.

“The country that [my mother] came to and her parents came to is not the same anymore, and I know it is heartbreaking to her that I don’t have what she had,” Toroian said.

While Congress has held hearings on the weaponization of the government, Toroian said the settlement agreement precludes her from suggesting a congressional review of SEC policy. However, Little did say that anyone called to testify under subpoena would be allowed to share their story.