A handful of judges on the U.S. Court of Appeals for the Fifth Circuit seem to have it out for the U.S. Securities and Exchange Commission and “the agency’s current activism.”
In May, a panel of the federal appellate court ruled that the SEC’s use of administrative law judges violates the Seventh Amendment right to trial by jury. The SEC is appealing.
On Tuesday, two judges in a separate panel of the Fifth Circuit issued a concurring opinion that clearly invites defendants being accused by the SEC of financial fraud, insider trading and securities fraud to challenge the federal agency’s use of “no admit, no deny” settlement agreements.
“If you want to settle, SEC’s policy says, ‘Hold your tongue, and don’t say anything truthful – ever’ – or get bankrupted by having to continue litigating with the SEC,” Judge Edith Jones wrote in a one-page concurring opinion joined by fellow Fifth Circuit Judge Kyle Duncan. “A more effective prior restraint is hard to imagine.”
“Given the agency’s current activism, I think it will not be long before the courts are called on to fully consider this policy,” Judge Jones wrote.
Legal experts say they understand Judge Jones’ concerns but that eliminating the “no admit, no deny” provisions in settlements would cause tremendous upheaval in the system, lead to far fewer SEC settlement agreements and force many more cases going to trial, which would actually place defendants at an even bigger disadvantage in their negotiations with the federal agency.
“This invites challenges to the SEC’s traditional settlement procedures,” said Vinson & Elkins partner Rebecca Fike, a former enforcement lawyer with the SEC’s Forth Worth regional office. “Defendants are far more concerned about not having to admit guilt. I have never in my mind thought of it as a ‘no deny’ clause.
“If we take administrative law judges off the table and then take this settlement option away, the inevitable conclusion is that way more cases are going to trial,” Fike said.
Toby Galloway, a partner at Winstead and a former lead trial lawyer with the SEC, agreed that the Fifth Circuit’s attack on the “no deny” part of the “no admit, no deny” provision is unusual.
“All of the attacks on this have almost always focused on the SEC not requiring defendants to admit their guilt when they settle,” Galloway said. “Now, I do have sympathies for less heeled individuals caught up in fraud schemes. But I am sorry – there’s just not much sympathy there for large corporations or rich criminals who want to want to cut a deal and escape a nasty trial but later want to proclaim some kind of innocence. ‘No admit, no deny’ is a policy that is defendant friendly.”
If Judge Jones’ concerns are for cost, then the SEC experts say the result of eliminating “no admit, no deny” will have the opposite effect and cause the price of defending a case against the SEC to skyrocket.
“Parties with legitimate defenses to SEC claims are indeed faced with the Hobson’s choice of engaging in incredibly costly litigation or accepting a ‘gag order’ as a condition of settlement with the SEC,” said Gray Reed partner Chris Davis, a former SEC enforcement lawyer. “On the other hand, however, for decades these types of settlements have been a very useful tool for both the SEC and defendants.
“Consequently, the impact of such a ruling would be potentially massive and likely very disruptive, at least in the short term, for both the SEC and defendants,” Davis said.
Judge Jones’ concurrence came in a case involving North Texas radio investment advisor Christopher Novinger and the company he founded, ICAN Investment Group. Novinger asked the Fifth Circuit to throw out a settlement agreement he and ICAN reached with the SEC six years ago.
In 2015, the SEC accused Novinger and the company of making false and misleading statements about the sale of $4.3 million in securities and collecting $515,000 in commissions as a result of those misleading statements.
Instead of taking the case to trial, Novinger, ICAN and the SEC reached a settlement agreement in 2016. As part of the agreement, the defendants agreed to the longstanding provision that they would never have to admit that they were guilty of the SEC’s allegations, but neither could they deny that the allegations were true.
In June 2021, Novinger and ICAN asked the U.S. District Court in the Northern District of Texas to throw out the “no deny” portion of the agreement because it violated their First Amendment right to free speech and their rights to due process.
In a 15-page opinion authored by Judge Carl Stewart – and fully joined by Judges Jones and Duncan – the Fifth Circuit panel ruled late Tuesday that the defendants have not made a sufficient factual showing that they should be granted relief.
“The defendants have not attempted to demonstrate a significant factual or legal change that justifies relief, much less one that was unanticipated when they entered the consent judgments,” Judge Stewart wrote. “Although the defendants argue that the terms incorporated into the judgments produce harmful effects, those are the terms to which they agreed. The defendants are not entitled to relief simply because it is no longer convenient to live with those terms.”
Judge Jones wrote that she was “pleased to concur in my colleague’s opinion denying relief on these defendants’ post-judgment motions.” And then she invited the legal challenge. Judge Stewart did not join in the concurring opinion.
Holland & Knight partner Jessica Magee, a former associate director of enforcement at the SEC, points out that Judge Jones pushed hard during oral arguments against the SEC’s “don’t discuss” settlement provision.
Magee said Judge Jones sees the provision as “bind[ing] a party to a consent decree to never voice opposition to the underlying facts.”
“It is clear from her concurring opinion in Novinger that she isn’t backing off that view, and I think it’s fair to expect to see more fights like this, positioning the agency’s ‘no admit, no deny’ policy as a ‘gag order’ prohibiting any form of truthful discussion about a prior case,” Magee said.
The SEC, Magee said, will likely argue that “narrowness of the provision prohibits denying the allegations rather than truthfully addressing or describing the underlying facts.”
“As is often the case though, the devil is in the details of what a former defendant says (or wants to say), to whom, when and why,” said Magee. “Imagine a prior defendant who agreed to settle negligence or strict liability charges when she could not afford to litigate now wanting to candidly explain the circumstances of the prior action in order to be transparent as part of job interview process.”
“I would hope this sort of truthful disclosure is not the sort of speech the SEC wants to avoid, but the risk of being wrong to a one-time defendant can certainly have a chilling effect on even the most appropriate form of discussion,” she said. “Time will tell if the Novinger defendants seek en banc review or further consideration, but the debate on this topic is not over.”
Magee’s colleagues at Holland & Knight wrote about the Novinger case in this June 23 article: https://www.hklaw.com/en/insights/publications/2022/06/sec-sidesteps-gag-order-constitutional-challenge-for-now