The U.S. Supreme Court on Tuesday dismissed a challenge brought by a former Xerox Corp executive and backed by Elon Musk against a Securities and Exchange Commission (SEC) rule requiring people who agree to settlements with the agency not to not deny his allegations against them.
Judges refused to hear former Xerox chief financial officer Barry Romeril’s appeal of a lower court’s ruling that the rule does not violate his First Amendment free speech rights of the American Constitution. Romeril agreed under the rule not to deny accounting fraud allegations he settled with the SEC in 2003.
Musk, the CEO of Tesla Inc and the richest person in the world, is seeking an end to his own 2018 SEC settlement. In April, Musk signed a legal brief in favor of Romeril. Musk’s settlement forced a Tesla lawyer to verify some of his Twitter posts, resolving an SEC lawsuit accusing him of defrauding investors by tweeting that he had “secure funding” to take his company private. electric cars, although a takeover is not near.
Defendants can dispute the SEC’s allegations, but an agency policy dating back to 1972 states that when settling without admitting wrongdoing, they must also agree not to contradict the agency’s findings. If a defendant violates its rule, the SEC may seek to void it and litigate the claims.
Critics called it a “gag” rule. The SEC said dumping the rule would hurt its credibility and strain its resources by prompting more lawsuits.
Romeril was one of six executives who settled allegations of inflating Xerox profits by US$1.4 billion in the late 1990s. He agreed to pay more than $5 million in fines and to be permanently prohibited from acting as a director of a public company.
Romeril made an offer to remove the no-opt-out clause from his deal in 2019, which a Manhattan-based federal judge refused. Romeril then argued before the 2nd United States Circuit Court of Appeals, based in New York, that the judge never had the authority to approve the settlement because it unconstitutionally violated the protections of freedom of speech.
The 2nd Circuit ruled last year that Romeril waived his right to free speech to avoid litigation, rejecting his argument that the deal violated the First Amendment.
Reporting by Lawrence Hurley and Judy Godoy; Editing by Will Dunham