The U.S. Supreme Court on Tuesday dismissed a lawsuit by a former Xerox executive against the Securities and Exchange Commission, backed by Tesla CEO Elon Musk, against the practice of the Securities and Exchange Commission, those who agree to settlements with the agency , to prevent them from proclaiming this public innocence.
The SEC’s so-called gag rule was introduced in 1972 to prevent those who align themselves with the agency from discrediting its enforcement of securities laws. Given that the SEC settles the vast majority of the cases it brings, the policy is viewed as an important tool for a regulator that lacks the resources to bring all of the violations it prosecutes to court.
The judges declined to hear a case brought by the former Xerox Holdings Corp. XRX, -0.13% Chief Financial Officer Barry Romeril, who questioned the constitutionality of the SEC’s 2003 gag order as he reconciled allegations he had imposed on his employees misleading accounting adjustments affecting Xerox’s earnings in soared without admitting or denying the allegations. He was forced to pay more than $4 million in fines and disgorgements.
Romeril’s attorneys argued that the SEC’s policy of imposing gag orders violated Americans’ right to free speech, and his case was supported by other high-profile SEC critics, including Tesla CEO Elon Musk, billionaire Mark Cuban and hedge fund Nelson Olbus Philip Goldstein.
“There is no compelling public policy reason to enforce SEC gag orders on defendants who agree with the SEC,” they wrote in an April amicus letter filed with the court.
“The SEC requires full transparency and disclosure for the benefit of participants in the securities markets,” they added. “There is no compelling justification for the SEC to shirk that responsibility and to obfuscate and obscure information from defendants who settle with the SEC. To the contrary, preventing these settlement defendants from speaking acquitted deprives the securities markets of potentially material information and may harm the very market participants for whom the SEC seeks transparency and disclosure.”
Musk is also fighting in court to end his own 2018 settlement with the SEC after the executive released an infamous tweet in August 2018 that he had “secured funding” to buy Tesla for $420 a share to privatize, then a significant premium on the trading price of the stock.
Musk and Tesla settled with the SEC later that year, with Musk stepping down as Tesla’s chairman and agreeing, among other things, to have his tweets pre-approved by Tesla attorneys.