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Top Court Rejects Challenge to SEC ‘Gag Order’ Musk Opposed (2)

June 21, 2022, 1:39 PMUpdated: June 21, 2022, 2:38 PM

The US Supreme Court Tuesday rejected a challenge—backed by Elon Musk and Mark Cuban—of the SEC’s power to “gag” parties who settle with the agency.

The case stems from a challenge by former Xerox Corp. chief financial officer Barry Romeril, who sued for the ability to deny the Securities and Exchange Commission’s fraud allegations after he signed a 2003 settlement with the agency.

Romeril asked the high court to weigh in on whether his SEC deal, including a “no-deny” provision he referred to as a “gag order,” violated First Amendment free speech protections or constitutional guarantees of due process.

Musk, who last week appealed a ruling upholding his own settlement with the agency, joined an April amicus brief in support of Romeril’s petition. Musk’s “Twitter sitter” SEC deal calls for a Tesla Inc. attorney to screen all of his tweets related to the automaker after his 2018 missive indicating he had secured funding to take the company private.

Romeril’s settlement, which included more than $5.2 million in disgorgement, interest, and a civil fine, followed a 2003 case in which the SEC accused some Xerox executives of manipulating the printer company’s earnings reports. The deal also permanently barred him from serving as a public company officer or director.

There’s “no merit” to Romeril’s due process claims, the US Court of Appeals for the Second Circuit said in a 2021 opinion. The no-deny provision, which he first sought to strip from the settlement in 2019, didn’t “violate the First Amendment because Romeril waived his right to publicly deny the allegations,” the Second Circuit said.

Romeril’s March 21 petition argued that the 50-year-old SEC requirement that settling defendants permanently refrain from denying the agency’s allegations is “unmoored from well-established constitutional doctrine.”

Romeril can’t reopen the settlement at this point, but “even if the lawfulness of the no-deny provision were properly before the Court, petitioner’s First Amendment challenge lacks merit,” the SEC said in its May 23 opposition brief. He “identifies no circuit that has held such a provision unconstitutional,” so “further review is not warranted.”

The New Civil Liberties Alliance and Cahill Gordon & Reindel LLP represent Romeril.

The case is Romeril v. SEC, U.S., No. 21-1284, petition denied 6/21/22.

(Updates with additional amicus information.)

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Nicholas Datlowe at ndatlowe@bloomberglaw.com; Carmen Castro-Pagán at ccastro-pagan@bloomberglaw.com