Supreme Court Appeal: The SEC and the First Amendment

by Kate Brewer, Associate Member, University of Cincinnati Law Review Vol. 92

I. Introduction

This article explores the possible First Amendment issues that could be considered if the Supreme Court decides to review a “gag-rule” settlement agreement between the U.S. Securities and Exchange Commission (“SEC”) and Elon Musk. Part II provides background on the investigations the SEC has conducted into Musk and Musk’s argument against the “gag-rule” on First Amendment grounds. Part III discusses the merits of a First Amendment-based argument against the “gag-rule”. Finally, Part IV concludes by summarizing the likelihood of such an argument succeeding in the Supreme Court.

II. Background

In a recent development of an ongoing dispute between billionaire businessman Elon Musk and the SEC, a U.S. magistrate judge ordered Musk to testify again in an investigation into his purchase of the social media platform Twitter, now called “X”.¹ The commission conducted separate investigations into Musk’s statements made on X, both with respect to his purchasing of the social media platform and to his company Tesla, Inc.² In response to Musk not complying with the latest SEC investigations, the commission sought a judicial order for him to testify.³ However, a court notice following the ruling revealed that Musk’s legal team plans to seek review after the judge who ruled on the subpoena modified her decision, stating that her order will now only be a recommendation.⁴

The SEC has a history of bringing cases against parties who are then permitted to settle the matter without admitting wrongdoing, but in return, the SEC requires that these parties do not publicly deny the allegations brought against them.⁵ This is sometimes referred to as the “No Admit, No Deny” rule or “gag rule.”⁶ The practice has garnered criticism from federal judges and even an SEC Commissioner, who have expressed concerns about possible First Amendment violations.⁷ Although there have several judicial attempts to challenge the rule, none have resulted in a prohibition on the practice.⁸

The dispute between the SEC and the billionaire is ongoing. In 2018, the SEC filed a complaint against Elon Musk, alleging that he made false and misleading statements regarding his publicly traded company, Tesla, going private.⁹ The SEC also filed a complaint against Tesla for failure to implement controls and procedures to determine whether the Securities Exchange Act of 1934 required that information that its CEO, Musk, published via Twitter be disclosed.¹⁰ The court in each case ordered Musk and Tesla to pay civil penalties to the SEC.¹¹ Additionally, the terms of a settlement between Musk and the SEC required Musk to step down as the chairman of Tesla’s board of directors for three years, and Musk was ordered to receive approval for future written communications possibly relevant to Tesla shareholders.¹² In 2019, the SEC claimed that Musk violated this agreement by failing to seek or receive approval before publishing a statement on Twitter that was misleading to Tesla investors and could have influenced the price of Tesla stock.¹³ Later, the SEC accused him of attempting to manipulate Tesla stock prices in 2021 when he asked his Twitter followers whether he should sell some of his Tesla stock, which would have had a dramatic effect on the market price.¹⁴

However, the SEC’s investigation into Musk’s tweets is not limited to those involving Tesla. In 2022, it also authorized an investigation into Musk’s statements regarding his purchase of Twitter, which was a publicly traded company at the time.¹⁵ The investigation seeks to reveal whether he violated federal securities law when filling out the necessary paperwork regarding Twitter stock purchases and whether the statements he made in relation to the purpose were accurate.¹⁶

Although Musk had been complying with requests made by the SEC to testify to the investigation, he decided that he would no longer comply in September of 2023.¹⁷ In response, the SEC sought a court order to compel Musk to comply, resulting in the February 2024 magistrate decision.¹⁸ In December of 2023, Musk asked the U.S. Supreme Court to consider the matter, appealing the lower-court’s decision to uphold his agreement with the SEC that subjects his tweets to review when they were relevant to Tesla shareholders.¹⁹ The U.S. Supreme Court has yet to release a decision on whether to hear Musk’s appeal, but it did ask the Biden administration to respond to the appeal.²⁰ This may indicate some interest in Musk’s case. Although the SEC investigations into Musk’s social media activity differ with respect to the company that they impact – Tesla and Twitter (X), respectively – they both raise questions regarding the First Amendment right to free speech, which Musk contends is violated by the “gag rule.”²¹

III. Discussion

The SEC contends that, in his 2018 agreement with the SEC to have his written statement be reviewed, Musk knowingly and voluntarily relinquished his First Amendment rights.²² It rejects the assertion that Musk did not understand the agreement when it was negotiated and signed.²³ Indeed, this would likely be a difficult stance for Musk to prove, as someone who is well-versed in business, is no stranger to lawsuits and government regulation, and has access to competent and experienced legal counsel. Additionally, the agreement does not prohibit Musk from making any statements about Tesla or other business ventures and places the review responsibility in the hands of Tesla itself, not a court or the SEC, which the SEC contends was already reflected in Tesla’s policies “regarding Tesla-related communications.”²⁴

In 2022, a U.S. district court judge rejected Musk’s argument that the agreement violated his First Amendment rights, finding that Musk entered the agreement voluntarily.²⁵ The federal judge stated that, while Musk’s tweets are presumed to be protected speech, Musk himself conceded that there is no free speech right to engage in speech that is or could “be considered fraudulent or otherwise violative of the securities laws,” which is the type of speech prohibited under the agreement between Musk and the SEC.²⁶ Additionally, while the agreement does require pre-approval of his communications related to Tesla, the judge stated that First Amendment rights can be waived in consent decrees such as the one in this situation.²⁷

Relevant precedent to this matter includes SEC v. Romeril, which has garnered the attention of First Amendment scholars and individuals under investigation by the SEC in the past couple of years.²⁸ Barry Romeril, former chief financial officer of the Xerox Corporation had civil enforcement action brought against him for alleged securities fraud; in response, Romeril agreed to a final judgment against him and to not deny any of the complaint’s factual allegations.²⁹ Years later, Romeril sought to have the judgment invalidated, asserting that it violated the First Amendment.³⁰ The Second Circuit Court of Appeals, however, found there was not a First Amendment violation because Romeril voluntarily waived his right in the agreement.³¹ Notably, the court wrote in its opinion, “[a] defendant who is insistent on retaining the right to publicly deny the allegations against him has the right to litigate and defend against the charges. Romeril elected not to litigate.”³² In 2022, Musk joined other businessmen and the Investor Choice Advocates Network in filing an amicus criticizing so-called SEC “gag orders” for “depriving the securities markets of potentially material information” to support Romeril’s petition for writ of certiorari, but the Supreme Court declined to hear the case.³³ To predict how the Supreme Court might rule on Musk’s appeal if they decide to hear it, it is worth analyzing the judicial decisions of lower courts and the arguments against the SEC’s practices.

Musk is not the only individual who has sought to challenge SEC “gag orders” in court. In fact, one case was at issue as recently as February of 2024, brought to the U.S. Court of Appeals for the Fifth Circuit by Christopher Novinger, a financial planner who similarly settled with the SEC and was not required to admit to any wrongdoing, but had to refrain from making any public statements denying the allegations brought against him in 2016.³⁴ Novinger’s attorneys attempted to argue their case by pointing to examples of similar conditions by government entities that were found to violate the First Amendment, such as when the Fourth Circuit struck down a non-disparagement clause instituted by the city of Baltimore in a police brutality settlement.³⁵ However, the Novinger’s case has struggled at least in part because of the untimeliness of the proceedings, which may also be of concern if the Supreme Court hears Musk’s appeal.³⁶

Defendants in SEC proceedings are not forced to settle and accept the commission’s No-Admit-No-Deny terms; they can, of course, choose to fight the allegations. Yet, critics of the SEC “gag order,” including the New Civil Liberties Alliance, contend that it is unfair because those who are investigated by the SEC usually choose to settle due to the millions of dollars it reportedly costs to comply with the investigations and defend themselves against the accusations.³⁷ Yet, this argument seems unlikely to hold weight in a court of law when raised in the defense of billionaires such as Elon Musk and Mark Cuban, who voluntarily agreed to settlements worth tens of millions of dollars and are presumably in the financial position to choose to litigate.

Another argument made against the practice is that it violates the Federal Rules of Civil Procedure. The rule that Romeril attempted to challenge his SEC settlement under was FRCP 60(b)(4), which states that “on motion and just terms, the court may relieve a party or its legal representative from a final judgment, order, or proceeding [because] the judgment is void.”³⁸ The Second Circuit court noted that this rule provides relief from final judgments if there is either a jurisdictional error or a failure of due process, neither of which were found to exist where Romeril voluntarily entered a settlement with the SEC.³⁹ Meanwhile, others have expressed wariness at the idea of the No-Admit-No-Deny rule being revoked or struck down. If defendants could accept a no-fault settlement but publicly deny the charges, the SEC could possibly move away from accepting settlement deals to maintain their reputability, resulting in increased litigation that would be costly for both defendants and the commission.⁴⁰

In terms of First Amendment violations, critics of the rule assert that this type of restriction is a prior restraint on content-based speech, which is looked upon with great scrutiny in the eyes of constitutional law.⁴¹ Prior restraints on speech are government actions that “prohibit speech or other expression before the speech happens,” which could possibly be said of the SEC rule forbidding settlers to deny their guilt.⁴² Additionally, critics have contended that the rule is not “narrowly tailored” and does not serve a “compelling government interest” as required for free speech restrictions to be permitted.⁴³

However, even if these assertions are true, it will likely be difficult for the Supreme Court to find in the favor of the “gag rule” critics when its requirements are voluntarily agreed to by parties who choose to enter into SEC settlements. This is because it has long been established that the First Amendment rights can be, and often are, waived, as long as the waiver is made voluntarily, knowingly, and intelligently.⁴⁴ However, these instances usually involve the restriction of free speech by private entities, not government agencies. In Snepp v. U.S., an employee signed a contract with the CIA agreeing to not publish any information relating to his employment without approval. When he did so, the CIA sued and the employee claimed a violation of his First Amendment rights, but the Supreme Court disagreed at least partly because the employee voluntarily signed the agreement.⁴⁵

IV. Conclusion

Although matters of national security were implicated in Snepp and not so much when it comes to the SEC’s investigations into the likes of Elon Musk and Mark Cuban, it may be a basis for predicting a possible Supreme Court decision on the “gag rule,” Given the autonomy that Musk and others have had in accepting the terms of the rule and the purposes that the rule serves, including judicial efficiency and safeguarding the SEC’s reputation, it seems unlikely that the Supreme Court will strike down the rule, if they choose to hear Musk’s case at all.

Cover Photo by Glenn Carstens-Peters on Unsplash

Kate Brewer

Kate Brewer is local to the Cincinnati area but received her BA in Political Science from the University of Tennessee. She is now a 2L at the University of Cincinnati College of Law. In addition to Law Review, Kate is an Article Editor for the Human Rights Quarterly and the External Affairs Coordinator for the International Law Society. Kate also enjoys spending time with her cats and studying Russian

References

1
Order Compelling Compliance With Administrative Subpoena, SEC v. Musk, No. 3:23-mc-80253 (2024).
2
SEC v. Musk, No. 1:18-cv-8865 (S.D.N.Y. Sept. 27, 2018); SEC v. Tesla, Inc., No. 1:18-cv-8947 (S.D.N.Y. Sept. 27, 2018).
3
Order Compelling Compliance, supra note 1.
4
Chris Prentice, US Judge Says Musk Can Seek Review of Order in SEC Subpoena Matter,Reuters (Feb. 16, 2024), https://www.reuters.com/legal/musk-can-seek-district-judge-review-sec-subpoena-case-court-order-2024-02-16/.
5
17 C.F.R § 202.5(e) (2008).
6
Id.
7
Hester M. Peirce, Unsettling Silence: Dissent from Denial of Request for Rulemaking to Amend 17 C.F.R § 202.5(e), U.S. Sec. and Exch. Com’m (Jan. 30, 2024), https://www.sec.gov/news/statement/peirce-nand-013024; SEC v. Novinger, 40 F.4th 297, 308 (Jones, J., dissenting).
8
SEC v. Novinger, 40 F.4th 297 (5th Cir. 2022); SEC v. Romeril, 15 F.4th 166 (2nd Cir. 2021).
9
SEC v. Elon Musk, Case No. 18-cv-8865 (S.D.N.Y.) SEC v. Tesla, Inc. Case No. 18-cv-8947 (S.D.N.Y), U.S. Sec. and Exch. Comm’n (Feb. 2, 2024), https://www.sec.gov/enforcement/information-for-harmed-investors/tesla#.
10
Id.
11
Id.
12
SEC v. Musk, No. 1:18-cv-8865 at 4.
13
SEC v. Musk, No. 1:18-cv-8865 (S.D.N.Y. Feb. 25, 2019).
14
SEC v. Musk, No. 1:18-cv-8865 at 4. /mfn] In May of 2023, a federal appeals court rejected Musk’s bid to modify or end the fraud settlement with the SEC, which he called a “government imposed muzzle.”¹⁴Brief for Defendant-Appellant at 1, SEC v. Musk, 2022 WL 6959895 (2023) (No. 22-1291-cv).
15
Letter from Nicholas P. Panos, SEC Senior Special Counsel, to Elon R. Musk (Apr. 4, 2022), https://www.sec.gov/Archives/edgar/data/1418091/000000000022003713/filename1.pdf.
16
Id.
17
SEC v. Musk, No. 3:23-mc-80253 (N.D. Cal. Oct 5, 2023).
18
Order Compelling Compliance, supra note 1.
19
Petition for A Writ of Certiorari, Musk v. SEC, (No. 23-626), 2023 WL 860143.
20
Greg Stohr, Supreme Court Seeks SEC Response to Musk Social Media Appeal, Bloomberg L. (Dec. 21, 2023), https://news.bloomberglaw.com/tech-and-telecom-law/supreme-court-seeks-sec-response-to-musk-social-media-appeal.
21
Petition for a Writ of Certiorari, supra note 20, at 11.
22
Brief for the Plaintiff-Appellee at 19, SEC v. Musk, No. 22-1291 (2d Cir. 2022).
23
Id. at 20.
24
Id. at 2
25
SEC v. Musk, No. 18-cv-8865, 2022 U.S. Dist. LEXIS 76654 (S.D.N.Y. Apr. 27, 2022).
26
Id. at 24
27
Id. at 25.
28
Brief of the Competitive Enterprise Institute et. al. as Amici Curiae Supporting Petitioner, Romeril v. SEC, No. 21-1284 (2022); Brief of Constitutional Law & First Amendment Scholars as Amici Curiae in Support of Petitioner, Romeril v. SEC, No. 21-1284 (2022); Brief of Mark Cuban, Phillip Goldstein, Elon Musk, Nelson Obus, and Investor Choice Advocates Network as Amici Curiae in Support of Petitioner, Romeril v. SEC, No. 21-1284 (2022).
29
SEC v. Romeril, 15 F.4^th 166,169, (2d Cir. 2021).
30
Id. at 170.
31
Id.at 172.
32
Id. at 172.
33
Brief of the Competitive Enterprise Institute, supra note 29.
34
SEC v. Novinger, 40 F.4th 297 (5th Cir. 2022).
35
Appellants’ Reply Brief at 22, SEC v. Novinger, No. 4:15-cv-00358, U.S. Dist. LEXIS 91758 (N.D. Tex., Nov. 3, 2023).
36
Matthew Bultman, SEC ‘Gag Orders’ at Risk as Skeptical Court Takes Up Challenge, Bloomberg L. (Jan. 24, 2024), https://news.bloomberglaw.com/securities-law/sec-gag-orders-at-risk-as-skeptical-court-takes-up-challenge.
37
Margaret A. Little, What Is The SEC So Afraid Of?, Daily J. (Feb. 9, 2024), https://www.dailyjournal.com/articles/377118-what-is-the-sec-so-afraid-of; NCLA Launces Animated Video and Petition to End “Gag Rule” that Silences People Who Settle with SEC, New Civ. Liberties All. (June 4, 2020), https://nclalegal.org/2020/06/watch-ncla-launches-animated-video-and-petition-to-end-gag-rule-that-silences-people-who-settle-with-sec/.
38
Fed. R. Civ. P. 60(b)(4).
39
SEC v. Romeril, 15 F.4th 166 at 172, 174.
40
Declan Harty, SEC’s ‘Gag Rule’ Denounced as ‘Occupational Death Sentence’, Politico (Feb. 12, 2024), https://www.politico.com/news/2024/02/12/sec-gag-rule-lawsuit-ncla-00140757.
41
New Civil Liberties Alliance, Petition to Amend In re SEC Rule Imposing Speech Restraints in Consent Orders (2018), https://www.sec.gov/files/rules/petitions/2018/petn4-733.pdf.
42
Prior Restraint, Cornell L. Sch. Legal info. Inst., https://www.law.cornell.edu/wex/prior_restrain.
43
New Civil Liberties Alliance, supra note 42, at 11-12.
44
Curtis Publ’g Co. v. Butts, 388 U.S. 130, 144-45 (1967); see also D.H. Overmyer Co. v. Frick Co., 405 U.S. 174, 185-86 (1972).
45
Snepp v. U.S., 44 U.S. 507 (1980).

I. Introduction

II. Background

III. Discussion

IV. Conclusion

Author

References

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