Are you a crypto entrepreneur who settled charges with the SEC for fear of drawn-out litigation? But you don’t think you actually did anything wrong?

Turns out you can’t tell us even if you wanted to.

When you settle charges with U.S. Securities and Exchange Commission, you become bound by the SEC’s decades-long “neither admit nor deny” policy, which hinders your ability to speak freely about the specifics of your case, and explicitly prohibits you from even implying that the government’s allegations are without merit.

But that could soon change.


On Wednesday, the Washington, D.C.-based Cato Institute teamed up with the non-profit, public-interest law firm Institute for Justice, to sue the SEC over what they characterize as “perpetual, lifetime gag orders” that violate the First Amendment rights of settling defendants in civil enforcement actions. If they succeed, it would uproot the SEC’s standard settlement procedure, which could have a significant impact on the cryptocurrency industry—a market which, to date, has been largely regulated through enforcement action.

“The government uses its extraordinary leverage in civil litigation to extract from settling defendants a promise to never tell their side of the story, no matter how outrageous the government’s conduct may have been and no matter how strong the public’s interest may be in knowing how the government conducts itself in high-stakes civil litigation,” Cato claims in its lawsuit.

Approximately 98 percent of all SEC enforcement actions are settled out of court, according to Clark Neily, Cato’s vice president for criminal justice. “If you find yourself at the wrong end of a federal enforcement action, the likelihood that you are going to plead guilty or agree to a settlement is extremely high, regardless of whether you’ve done anything wrong,” he says. The SEC and other federal agencies have developed an “extraordinarily coercive and effective suite of tools” to induce settlements, says Neily, meaning the SEC almost never presents its evidence to a court or receives a clear statement from a judge regarding a defendant’s alleged wrongdoing.

But overturning the silencing provisions imposed by the SEC in settled enforcement actions isn’t just about those who may have been wrongfully accused but felt pressured to settle. According to the New Civil Liberties Alliance (NCLA), which itself filed a petition with the SEC in late October to amend the “gag rule,” the issue is as much about potential under-regulation as it as about over-regulation.


Peggy Little, senior litigation counsel for the NCLA, explains that the rule was first enacted in 1972 over concerns that people were settling with the Commission but then publicly saying there was, in fact, no case against them. “By 2008, [U.S. District Judge Jed Rakoff of Manhattan] was saying people are settling, and they're getting off pretty much scot-free for some very troubling conduct,” she says. “Our position is whether the SEC is over-enforcing or under-enforcing, both of those things are a matter of public interest and need to be open and transparent to the public.”

Transparency may indeed benefit the murky regulatory waters of cryptoland, where—on one end—SEC enforcement actions against ICO-funded crypto startups have been pronounced a death sentence for the industry, while—on the other—simultaneously criticized as mere “slaps on the wrist.” And while crypto startups await the SEC’s long-since promised “plain-English” and no-action guidance that both Director William Hinman and Chairman Jay Clayton indicated would be forthcoming (now further delayed by the SEC's indefinite shutdown), the industry is left with the Commission’s settled cases as its only guiding light.

“There’s really no transparency about what actually happened in these cases,” says NCLA attorney Caleb Kruckenberg. “And to the extent that the Commission is addressing questions about whether certain currencies should be regulated as securities, that’s a very facts-intensive question that depends on a lot of different circumstances,” he says. “ And now you have respondents who are not even in a position to dispute the Commission’s characterization of their own product.”

The NCLA’s petition to amend the silencing provisions of the gag rule quotes Commissioner Hester Peirce, who criticizes the Commission for relying on enforcement to provide regulatory guidance: “Quite simply, a settlement negotiated by someone to end an investigation that is disrupting or destroying her life should not form the basis on which the law applicable to others is based,” Peirce said during a speech in May.

Little says the SEC's gag rule effectively "silences criticism" of the Commission and its actions in these cases, because it prevents everyone who has settled against the SEC from ever even "creating the impression" that the complaint lacked merit. "If you do later question the merits, severity or fairness of the SEC case, you can be re-prosecuted," says Little. "This is a profoundly disturbing use of government power.”

"From a legal perspective," she says, "it seems to me to be astonishing that an agency can get away with a practice that people in much higher ranked constitutional positions cannot. If Congress cannot enact a law that would do this, an agency certainly should not be doing this through regulation.”

Ending the gag rule could bring some much needed clarity to the SEC's otherwise opaque, "quiet" handling of the crypto companies that have allegedly violated securities laws, says Little. "To the extent that an industry is being regulated through enforcement, and because virtually all of these cases settle, the enforced silence works to keep the practice of regulation by enforcement out of the public eye."

Decrypt reached out to the SEC for comment, but the Commission is itself currently muzzled—another victim of the government shutdown.


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