U.S. judge questions the silencing provisions of no-admit-no-deny settlements with the SEC
Persons named in regulatory enforcement proceedings often face a challenging choice in how to respond to threatened, public allegations of wrongdoing following an investigation: fight the allegations and endure costly and protracted proceedings? Or settle the matter more promptly but risk having to make reputation-depleting admissions as a condition to any such settlement? No-admit-no-deny settlement programs were intended to soften these stark options, but they continue to face challenges. For both traditional admission-based settlements as well as no-admit-no-deny settlements, parties ordinarily agree to restraints that deny their ability to make any statements, public or otherwise, that are inconsistent with the terms of the settlement. This latter requirement has recently been the subject of scrutiny.
On October 28, 2022, a strong criticism of no-admit-no-deny provisions in settlements from Judge Ronnie Abrams emerged in United States Securities and Exchange Commission v. Fernando Motta Moraes. In the decision, Judge Abrams questioned the use of provisions in settlement agreements barring defendants from ever publicly denying the allegations against them. Similar provisions are used in Canadian regulatory settlements, which limit a parties’ ability to explain circumstances that led to settlements where the explanations may be inconsistent with statements made in those agreements. Judge Abrams’ opinion prompts a reminder of the purpose and utility of settlements with securities regulators in the U.S. and Canada.
The case arises out of the 2018 acquisition of Dun & Bradstreet Corporation (DNB) by a private investor group. Moraes, who was the Chief Operating Officer and controller of Worth Capital, signed a nondisclosure agreement in relation to the acquisition. The complaint filed by the Securities and Exchange Commission (SEC) on September 20, 2022, alleges Moraes subsequently violated the nondisclosure agreement when he used confidential information relating to the transaction to purchase DNB options before the acquisition became public, and later sold the options the day after the announcement. The information was also used by Moraes to tip another trader.
The settlement agreement between Moraes and the SEC contained a provision barring Moraes from making any public statements that either deny any allegations contained in the complaint or that suggest Moraes does not admit the to allegations contained in the complaint, otherwise called a no-admit-no-deny provision.
On October 28, 2022, U.S. District Judge Ronnie Abrams released a decision [PDF] reluctantly allowing the settlement between Moraes and the SEC while raising concerns about the use of the provision that silences parties from making public statements inconsistent with the admission of wrongdoing contained in the settlement. In a strongly worded opinion, Judge Abrams opined that by routinely demanding that defendants sacrifice the ability to ever deny the allegations against them with the use of the no-admit-no-deny provision, the SEC was indefinitely silencing them from speech otherwise protected by the First Amendment. Judge Abrams wrote that the federal judiciary had essentially “normaliz[ed] lifetime gag orders” in this practice of including no-admit-no-deny provisions in settlement agreements.
Judge Abrams acknowledged that in the course of resolving legal proceedings, parties could waive basic rights, including their First Amendment rights in consent decrees. This did not mean, however, that the government should be in the business of demanding such a waiver of legal rights, as certain prerequisites to many regulatory settlements (including the no-admit-no-deny provisions) may be inconsistent with the spirit of the First Amendment and the tradition of protecting free expression. By preventing defendants from publicly defending themselves or criticizing the SEC’s handling of the case, Judge Abrams concluded that no-admit-no-deny provisions deny the public the opportunity to scrutinize the government’s enforcement practices.
The historical debate over settlements in the U.S.
Judge Abrams’ criticism of the no-admit-no-deny provision in this case is not the first example of a U.S. court intervening in settlements between the SEC and respondents. For example, in 2011, U.S. District Judge Jed Rakoff notably rejected [PDF] a no-contest settlement (a settlement in which the respondent makes no admissions of fact or liability whatsoever) between the SEC and Citigroup on the basis that it did not “provide the Court with a sufficient evidentiary basis to know whether the requested relief is justified under any of these standards.”
His decision was later reversed by the U.S. Court of Appeals for the Second Circuit (Appellate Court) in 2014, who found that the Court had “abused its discretion” and applied an incorrect legal standard by requiring the SEC to establish the truth of the allegations against Citigroup as a condition for approving the settlement. As we wrote then, Judge Rakoff later reluctantly approved the settlement, highlighting that as a result of the Appellate Court’s decision, settlements of this sort would be subject to “no meaningful oversight whatsoever.”
Settlements with securities regulators in Canada
Judge Abrams’ concerns about provisions limiting a respondent’s ability to speak freely about the case may be relatable to settlements routinely entered into with securities regulators in Canada, where such prohibitive speech provisions are commonplace. In Ontario and many other Canadian jurisdictions, a condition of settling regulatory allegations is an agreement that the settling respondents will not speak publicly in contradiction to any of the terms or findings agreed upon in the settlement. In these settlements, the respondent admits wrongdoing — and facts underlying it — with the Canadian securities regulator prohibiting any public statements inconsistent with the settlement agreement (which tends to include, practically or otherwise, any additional agreed facts submitted at the settlement hearing). Judge Abrams’ concerns about no-admit-no-deny provisions denying both the respondent from defending themselves and the public the opportunity to scrutinize enforcement practices can therefore be seen to be applicable to any settlement with a Canadian securities regulator.
Settlements of any sort remain an important tool for securities regulators to maintain timely and efficient resolution of enforcement matters. For example, the use of no-contest settlements with securities regulators would likely resolve several of the concerns raised by Justice Abrams. However, they are used infrequently.
The Ontario Securities Commission implemented a Credit for Cooperation Program in 2014, encouraging market participants to self-police, self-report and self-correct behaviour that may be contrary to the public interest. The results of participation in this program include the potential for a no-contest settlement. This decision by the OSC followed a published contemplation of the SEC’s use of these settlements. Similarly, in 2018, the Alberta Securities Commission announced it would allow respondents to enter into no-contest settlement agreements for self-reported conduct where respondents cooperate with regulators and are taking financial responsibility for their actions. The OSC approved its first no-contest settlement in October 2014 but has approved relatively few of them since.
This renewed judicial scrutiny of settlement provisions in the U.S. will no doubt be of interest to market participants and regulators on both sides of the border. Judge Abrams has added to the conversation on settlement processes for regulatory administrative allegations in both the U.S. and Canada, highlighting the trade-offs associated with settling and the implications of respondents’ waiving of certain rights in order to resolve legal proceedings. These demands are regularly made of respondents to resolve any regulatory allegations through settlement. The calculus becomes whether the trade-off in avoiding specific admissions to settle a matter is worth a respondents’ subsequent right to criticize the regulator’s actions in any particular case. Whether Canadian securities regulators are influenced by Judge Abrams’s reasoning remains to be seen.
 United States Securities and Exchange Commission v. Fernando Motta Moraes, Civil Action No. 22-cv-8343 (RA).
 See the Complaint of the United States Securities and Exchange Commission v. Fernando Motta Moraes, Civil Action No. 22-cv-8343 (RA).