Cato Inst. v. U.S. Sec. & Exch. Comm'n

438 F.Supp.3d 44

CATO INSTITUTE, Plaintiff,

v.UNITED STATES SECURITIES AND EXCHANGE COMMISSION, et al., Defendants.

Civil Action No. 19-0047 (ABJ)

United States District Court, District of Columbia.

Signed February 10, 2020

Paul Michael Sherman, Robert J. McNamara, Institute for Justice, Arlington, VA, Jaimie Nam Lee Cavanaugh, Pro Hac Vice, Institute for Justice, Minneapolis, MN, for Plaintiff.

Matthew Scott Ferguson, Melinda Hardy, United States Securities and Exchange Commission Office of the General Counsel, Washington, DC, for Defendants.

MEMORANDUM OPINION

AMY BERMAN JACKSON, United States District Judge

Plaintiff Cato Institute ("Cato" or "plaintiff") has brought this action against the United States Securities and Exchange Commission ("SEC"); Jay Clayton, in his official capacity as Chairman of the SEC; and Vanessa A. Countryman, in her official capacity as Secretary of the SEC. Plaintiff seeks to challenge the SEC's policy of including "no-deny" provisions in its consent judgments in civil or administrative proceedings. Am. Compl. [Dkt. # 11]. These provisions preclude a settling party from publicly denying the allegations in a complaint resolved by consent. Id. ¶ 1. Plaintiff claims that the agency's policy of silencing the subjects of its investigations violates the First Amendment of the Constitution. Id. ¶ 73. But the Cato Institute was not the subject of any investigation, and it is not party to any consent judgment; it brings this action alleging that its ability to publish and promote the parties' stories has been compromised.

Defendants moved to dismiss the complaint on the grounds that plaintiff lacks standing to bring the case and that it has failed to state a claim upon which relief can be granted. Defs.' Mot. to Dismiss Pl.'s Am. Compl. [Dkt. # 12] ("Defs.' Mot."). Because the Court finds that plaintiff lacks standing to challenge the SEC's "no-deny" policy, the Court will grant defendants' motion to dismiss for lack of subject matter jurisdiction. Because the Court has no power to hear the case, this opinion does not address the merits of the dispute, and it should not be read to express any view about the wisdom of the policy.

BACKGROUND

In 1972, the SEC promulgated a regulation adopting a formal policy that it would not "permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegations in the complaint or order for proceedings." 17 C.F.R. § 202.5(e) (1972). The agency explained that "in any civil lawsuit brought by [the SEC] or in any administrative proceeding of an accusatory nature pending before it, it is important to avoid creating, or permitting to be created, an impression that a decree is being entered or a sanction imposed, when the conducted alleged did not, in fact, occur." Id.

Plaintiff alleges that the SEC has carried out this policy by requiring that an express "no-deny" provision be included in the consent judgment as a condition of settling any civil or administrative action brought by the agency. Am. Compl. ¶ 16. The provision prohibits settling defendants from "publicly asserting that any of the SEC's allegations are untrue or otherwise lack a factual basis." Id. ¶ 21. And, according to the complaint, since 2002, the SEC has had a steady settlement rate of approximately ninety-eight percent. Id. ¶ 26, citing Priyah Kaul, Admit or Deny: A Call for Reform of the SEC's ‘Neither-Admit-Nor-Deny’ Policy , 48 U. MICH. J. L. REFOR. 535, 536 (2015).

The events that form the basis of plaintiff's suit began in 2018, when Cato's Vice President for Criminal Justice, Clark Neily, "privately received a copy of a manuscript written by an author who claimed he had been the victim of prosecutorial overreach at the hands of officials at the SEC." Am. Compl. ¶ 31. The amended complaint states that the manuscript "describes a long and expensive battle at the end of which the author ... ultimately [settled and] admitted to engaging in certain limited conduct in order to avoid crippling litigation expenses." Id. ¶ 32.

The "no-deny" provision contained in the author's settlement agreement provides:

Defendant understands and agrees to comply with the Commission's policy "not to permit a defendant or respondent to consent to a judgment or order that imposes a sanction while denying the allegation in the complaint or order for proceedings." 17 C.F.R. § 202.5. In compliance with this policy, Defendant agrees not to take any action or to make or cause to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis. Defendant may testify truthfully about any matter under oath in connection with a legal or administrative proceeding, whether or not under subpoena.... If Defendant breaches this agreement, the Commission may petition the Court to vacate the Final Judgment and restore this action to its active docket.¹

Id. ¶ 37. The author asked Neily to assess the validity of the policy and the prospects for challenging or being relieved from the no-deny provision, so that he could publish his manuscript. Id. ¶ 31. In Neily's view, publishing the author's manuscript would "advance important public-policy goals of the Cato Institute"; the document addresses issues that have already been the subject of the organization's work, including "prosecutorial discretion, routine over-charging, and the danger of coercive settlements or plea bargains." Id. ¶ 33. In 2018, Cato entered into a contract with the author to publish his manuscript.² Id. ¶ 34.

Plaintiff alleges that it has taken substantial steps towards publication, but that it "cannot" complete the process because the author is bound by the "no-deny" provision contained in his settlement agreement. Am. Compl. ¶¶ 35–36. Plaintiff claims it "cannot exercise what would otherwise be its contractual right to publish and promote the SEC manuscript"; "[b]ut for the gag order," it "would immediately complete its editorial process and publish the SEC manuscript." Id. ¶¶ 39–40. Plaintiff says it would also "undertake promotional activities relating to the book ... [such as] writing about the book in newspapers and on the internet as well as sponsoring promotional events." Id. ¶ 41. According to the complaint, the publication of the author's manuscript and the public promotion of the book would be a violation of the author's settlement agreement with the SEC.³ Id.

Plaintiff also alleges that there are other individuals who signed "no-deny" provisions as a condition of settling enforcement actions who are willing to speak out against the SEC's policy. Am. Compl. ¶ 42. They contacted Cato and Vice President Neily in the wake of this lawsuit and voiced an interest in publicly contesting the SEC's allegations in their cases. Id. Plaintiff alleges:

But for the gag orders in place, these individuals would also be willing to permit the Cato Institute to publicly tell their stories or portions of their stories, including by repeating relevant details or quotations in essays, op-eds, or blog posts. Because and only because of the gag orders, the Cato Institute is unable to publish essays, op-eds, or blog posts containing any of these details or quotations.

Id. ¶ 44. Plaintiff also alleges that it "has begun to plan a panel discussion," since the "direct testimony of the individuals ... would be the most effective way to advance their public argument." Id. ¶ 45. According to plaintiff, "[b]ut for the existence of the gag orders, Cato would be able to very quickly complete its plans and hold this public discussion ... [and] host additional events...." Id. ¶¶ 46–47. Plaintiff concludes in Count I that the policy and practice of demanding no-deny provisions violates the First Amendment, and that their use and enforcement impose content-based restrictions on the right to speak freely. Id. ¶¶ 73–75.

Plaintiff initiated this action on January 9, 2019 and filed an amended complaint on March 1, 2019. Compl. [Dkt. # 1]; Am. Compl. It contends that the SEC's policy of including "no-deny" provisions in its consent judgments is a content-based regulation of speech that violates the First Amendment. See Am. Compl. ¶¶ 49–61. Plaintiff seeks: (1) a declaratory judgment that the SEC's "no-deny" policy is unconstitutional and unenforceable under the First Amendment; and (2) a permanent injunction barring the enforcement of preexisting "no-deny" provisions and prohibiting the implementation of the policy in the future. Id. at 16.

On May 10, 2019, defendants moved to dismiss the amended complaint pursuant to Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6). Defs.' Mot. at 1. Plaintiff opposed the motion on May 24, 2019, Pl.'s Opp. to Defs.' Mot. [Dkt. # 13] ("Pl.'s Opp."), and defendants filed a reply on June 7, 2019. Reply Mem. in Supp. of Defs.' Mot. [Dkt. # 15] ("Defs.' Reply"). Plaintiff also submitted a Notice of Supplemental Authority on July 12, 2019, see [Dkt. # 16-1] ("Pl.'s Notice"), to which defendants responded to on July 17, 2019. Defs.' Response to Pl.'s Notice [Dkt. # 17].

STANDARD OF REVIEW

In evaluating a motion to dismiss, the Court must "treat the complaint's factual allegations as true and must grant plaintiff ‘the benefit of all inferences that can be derived from the facts alleged.’ " Sparrow v. United Air Lines, Inc. , 216 F.3d 1111, 1113 (D.C. Cir. 2000) (internal citation omitted), quoting Schuler v. United States , 617 F.2d 605, 608 (D.C. Cir. 1979) ; see also Am. Nat'l Ins. Co. v. FDIC , 642 F.3d 1137, 1139 (D.C. Cir. 2011), quoting Thomas v. Principi , 394 F.3d 970, 972 (D.C. Cir. 2005). Nevertheless, the Court need not accept inferences drawn by the plaintiff if those inferences are unsupported by facts alleged in the complaint, nor must the Court accept plaintiff's legal conclusions. Browning v. Clinton , 292 F.3d 235, 242 (D.C. Cir. 2002).

Under Rule 12(b)(1), the plaintiff bears the burden of establishing...