The "Hobson’s Choice" of the SEC's No-Deny Rule in Settlements

Hobson’s Choice: Perspectives on the Latest Denial of a Challenge to the SEC’s “Gag” Rule

Last year, I noted to Politico that fighting the SEC or settling with the agency can be a “Hobson’s choice” for individuals and entities: dig in and continue to face a financial crippling investigation or litigation OR settle and give up your right to deny the allegations against you. There is no door #3.

For many parties embroiled in SEC investigations or litigation, there is the appearance of a voluntary choice when it comes to resolving matters. In reality, for many, the only option available is to settle on terms set by the agency. Such settlements preclude a settling party from denying the allegations in the charging document; instead, the settling party is limited to stating that they neither admit nor deny the allegations.

Or, as the Fifth Circuit Judge Edith Jones colorfully put it in her 2022 concurrence in Novinger v. SEC, “[i]f you want to settle, SEC’s policy says, ‘Hold your tongue, and don’t say anything truthful–ever’—or get bankrupted by having to continue litigating with the SEC.”

When the press covered the issue back in 2024 on the heels of the then-Commission’s denial of the ACLU’s 2018 petition to amend the SEC’s “no-admit/no-deny” rule under Rule 202.5 (e) (or the “gag rule” as it’s been so called), the issue was timely.

Now, with the Ninth Circuit issuing its opinion last week in Powell v. SEC denying the latest challenge to the “Rule,” a couple of points on the opinion and related matters are warranted.

SEC Charges California Resident for Engaging in a Manipulative Options Spoofing Scheme

The Securities and Exchange Commission today filed settled charges against Ryan N. Cole, a resident of Folsom, California, for allegedly conducting a manipulative trading scheme known as spoofing through which he obtained approximately $234,000 in ill-gotten gains.

According to the SEC’s complaint, Cole, while working as a trader for a financial firm, placed fake—or spoof—orders to manipulate the prices of thinly traded options, and then executed different orders at the resulting manipulated prices. Cole’s alleged scheme included placing multiple spoof orders across neighboring options series. To facilitate desired executions across these series, Cole used the complex order book to place multi-leg immediate-or-cancel orders. After his immediate-or-cancel orders were executed, Cole then cancelled his spoof orders. The SEC’s complaint further alleges that Cole took steps to conceal his spoofing scheme from the firm by providing false and misleading responses to questions posed about his trading. Ultimately, Cole was terminated by the firm.

SEC Rule for Investment Advisers on Shaky Ground in Atkins Era

As the Securities and Exchange Commission continues reversing course on past positions, investment advisers might be particularly interested in potential changes to a rule that prohibits advisers from defrauding investors in funds.

This rule, Advisers Act Rule 206(4)-8, has become a mainstay of the SEC’s registered and private fund enforcement program since its adoption in 2007. It has relied on the rule to bring enforcement actions addressing a broad swath of conduct by investment advisers, most often involving undisclosed conflicts and fee and expense abuses.

But its enforcement might be ripe for reassessment with SEC Chairman Paul Atkins’ return to the agency.

When the rule was adopted, Atkins—a commissioner at the time—unsuccessfully argued that advisers should be charged under the rule only when the SEC could show intentional or reckless misconduct. Instead, the rule imposed a mere negligence standard.

During the last administration, more than 100 enforcement actions were brought alleging a violation of the rule with most requiring only negligence. While very, very early days, since Atkins came on board in late April, he has yet to bring an enforcement action alleging a negligence-based violation of the rule.

Liberty Mutual in First FCPA Settlement Since Enforcement Restarted

Liberty Mutual will give up $4.7 million in profit to settle a U.S. criminal bribery probe into an Indian subsidiary, in the Department of Justice’s first public enforcement action of a federal anti-bribery law it resumed enforcing in June.

In a letter made public on Monday, the Justice Department said the subsidiary, Liberty General Insurance, paid $1.47 million in bribes to six state-owned banks, which in exchange referred customers to its insurance products.

Liberty’s scheme ran from 2017 to 2022 and resulted in $9.2 million in revenue and the $4.7 million in profit, the letter said.

The Justice Department said the settlement reflected Liberty’s acceptance of responsibility, cooperation including its March 2024 disclosure of the misconduct, and compliance upgrades.