What doesn’t the SEC want Volkswagen shareholders to know?

The SEC's routine gag orders profoundly violate the free speech rights of companies and individuals who settle with the agency.

When the Securities and Exchange Commission charged Volkswagen with fraud five years ago, the company emphatically disputed the charges as “legally and factually flawed” while assuring shareholders it would “vigorously” contest them.

Fast forward to 2024. The SEC and Volkswagen jointly told the court last month that the company has agreed to pay $48 million to settle all charges. The company said it was “pleased to have reached an agreement with the SEC” because it “values a constructive relationship” with its regulators.

So what changed? Unfortunately, we’ll never know. Nor will Volkswagen shareholders.

As with all enforcement case it settles, the SEC demanded, as a non-negotiable condition of the deal, a gag order stating that Volkswagen must never “make or permit to be made any public statement denying, directly or indirectly, any allegation in the [SEC] complaint or creating the impression that the [SEC] complaint is without factual basis.”

Like every other company that seeks peace with the SEC, the agency effectively told Volkswagen to clam up, or the deal’s off.

These routine SEC gag orders profoundly violate the free speech rights of companies and individuals who settle with the agency. Equally troubling, they deny company shareholders and the public their First Amendment right to hear both sides of the story.

Although finding an appropriate procedural vehicle to seek a judicial determination on the merits of these constitutional issues has proved challenging, at least three respected federal judges have expressed grave concerns about the First Amendment deprivations facilitated by SEC gag orders.

Two years ago, two judges on the U.S. Court of Appeals for the Fifth Circuit — Judges Edith H. Jones and Stuart Kyle Duncan — issued a short, non-precedential opinion that put the SEC on clear notice that its non-negotiable settlement gag orders are constitutionally suspect.  “A more effective prior restraint is hard to imagine,” they wrote. 

Several months later, U.S. District Judge Ronnie Abrams in New York echoed similar concerns while signing off on a separate SEC gag-order settlement.  She found particularly troublesome not only that the SEC routinely muzzles free speech while denying the public the opportunity to scrutinize its enforcement activity, but also that the agency enlists federal courts to enforce those restrictions. Judge Abrams concluded her decision with a simple question: “What is the SEC so afraid of?”

Gags on publicly traded companies such as Volkswagen are especially problematic, and ironically so. The SEC ordinarily requires such companies to provide robust disclosures to shareholders about important company events and expenditures of corporate assets. Yet now that Volkswagen has agreed to fork over nearly $50 million in shareholder assets to settle charges it previously disputed as “legally and factually flawed” and would be “vigorously contested,” the SEC itself is preventing the company from speaking truthfully about why it capitulated.

Despite judicial warnings, the SEC continues to demand gag orders in all settlements, showing no sign of backing away from this odious practice. The agency recently denied my organization's petition to amend its rules and discard the practice. As is often the case with bureaucratic depredations, courts are the last hope to stop them.

The judge in the Volkswagen case, Charles Breyer (brother of former Supreme Court Justice Stephen Breyer), criticized the SEC in 2019 for its procrastination in filing the case. He dismissed major parts of it in 2020. Judge Breyer had not yet signed off on the gag order as of this writing. 

As is typical in these situations, neither party to the settlement has any incentive to call its constitutional defects to the judge’s attention. Let's hope Breyer ferrets them out on his own and asks the SEC some tough questions.

Russell G. Ryan, a former SEC enforcement attorney, is senior litigation counsel with the New Civil Liberties Alliance.