End of SEC gag rule sought in circuit court appeal

Citing a countless number of people who have been harmed by a federal gag order in what an appeals petition calls a reign of error, the New Civil Liberties Alliance, representing the Cape Gazette and 10 others, is asking a circuit court to put an end to the decades-old silencing tactic.

In its U.S. Court of Appeals for the Ninth Circuit document filed June 17, petitioners are challenging the U.S. Securities and Exchange Commission’s ability to silence anyone who reaches a settlement with the SEC. Originally, the Cape Gazette joined a petition along with former Rehoboth Beach investment advisor Cassandra Toroian asking the SEC to change its no-admit-no-deny policy, which prevents anyone agreeing to an SEC settlement from publicly defending themself or criticizing the decision.

In January 2024, the five-member SEC board denied the request.

Petitioners are challenging the denial in a 74-page brief that states SEC’s half-century rule giving them the ability to silence critics is a direct violation of the First Amendment.

“The stakes are high. If the denial order is not vacated, this circuit will be disregarding its own precedent and complicit in hiding nearly all SEC agency enforcement practices from public scrutiny – in perpetuity,” the petition reads. “SEC’s denial of the rule-making petition perpetuates SEC’s 50-year unconstitutional reign of error.”

The Cape Gazette first learned about the SEC rule after reporting on Toroian, a former registered investment advisor and owner of Bell Rock Financial in Rehoboth Beach, who had been accused in 2022 by the SEC of cherry-picking stocks to benefit her and her family while posting losses for other investors. At the time, Toroian vowed to fight the allegation, pointing out that the SEC took a single day of trading to reach its conclusion instead of reviewing long-term performance.

But any further discussion about her case ended in 2023 after Toroian signed a consent order and final judgment on the matter with the SEC.

The order barred her from working in the securities industry, and 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.  

The order also prevented her from ever defending herself and denying she ever did anything wrong.

Toroian, the Cape Gazette and others represented by NCLA in the appeal have been buoyed by recent U.S. Supreme Court action against overreaching rules by unelected government department officials.

On June 27, the court ruled 6-3 in favor of hedge-fund founder George Jarkesy in his case against the SEC. The court agreed that Jarkesy, charged by the SEC with securities fraud, has a right to a trial under the Seventh Amendment and the SEC violated that right by using an administrative process.

In a similar vote the next day, the court overruled its 1984 decision that had given way to the Chevron Doctrine, allowing federal agencies to set rules in absence of case law.

The Chevron decision ruled that courts should interpret ambiguous law, not government entities.

The NCLA petition and 11 groups that have submitted amici curai briefs in support of it agree with the Chevron decision. The SEC and the Commodity Futures Trading Commission are the only two agencies in the U.S. allowed to impose the gag rule, which reportedly showed up in the Federal Register in the 1970s with no process to allow public comment.

“The founders, who enshrined the right of free speech, a free press, and rights of petition in the First Amendment, would never in their wildest imaginations have envisioned that a mere government agency could silence speech, dictate the content of speech, and compel corrective speech by those who would criticize the agency’s actions,” the petition states. “Congress itself could not enact a law extracting silence as a condition of settlement with the government; a mere administrative agency perforce lacks any such authority.”

In her dissent against the SEC denial, Commissioner Hester Peirce said the gag rule should be reexamined over its First Amendment concerns, suggesting scant factual basis and calling the gag rule largely theoretical.

NCLA is asking the court to come to a similar conclusion as Peirce, and put an end to the SEC’s gag rule.

“The gag rule was an affront to the Constitution the day it was deceitfully promulgated and remains so today,” the petition states. “SEC has no special expertise, much less competence, to decide constitutional questions. Its ill-placed reliance on a legally deficient argument that it can impose unconstitutional conditions upon settlement is far too slender a reed upon which to uphold its unlawful rule.”