By David Gabor
In Russell G. Ryan’s recent thoughtful article in the Wall Street Journal entitled “Get the SEC Out Of The PR Business,” he raised several issues that resonate well beyond the practices of the SEC and into the world of advertising law, direct marketing and FTC enforcement actions.
The gist of Ryan’s article is that the SEC’s pre-trial press releases and Public Relations “announcements” have the effect of unfairly trying its targets in the court of public opinion. He specifically makes the point that many of the press releases — which are typically made at the very outset of a prosecution — violate the so-called “Cinderella Schools” doctrine. That doctrine, originating from a case involving the Cinderella Career and Finishing Schools, was litigated in the 1970s, and resulted in certain FTC orders being nullified because of due process violations stemming from pre-trial pronouncements by the head of the agency that demonstrated pre-judgment. Supposedly, safeguards were put in place to protect against such violations. However, courts in the meantime, have upheld the right of governmental enforcers to make certain public pronouncements — and the agency enforcers have more than run with it.
As a result, the new crop of press releases are often derogatory, shaming and, in this writer’s view, straightforward violations of due process and the bedrock concept of “innocent until proven guilty.” See, e.g., “FTC Cracks Down on Scammers Trying to Take Advantage of the Economic Downturn“
In the web-citation, above, for example, which is from a case I was involved two years ago, the government corralled a number of disparate defendants, and, without so much as preliminary hearing, branded all of them “scammers” — and worse. The fact that the government ultimately prevailed against certain of the targets cannot color the issue, because in other cases, it does not.
The problem with issuing pre-trial press releases is that the government has enormous powers and resources that most individual defendants do not have. While the government has a certain credibility as protector of the public interest, there is also arguably too much headroom for overzealous prosecutors to tar and feather targets without trial. It’s a kind of swaggering litigator syndrome that is not appropriate given the public function and funding of such officials. I addressed this issue in my recent publication related to the “power of the press release.”
This is an alarming trend throughout many government enforcement branches. It is particularly egregious in the FTC space. I have written before about how the FTC’s press releases have put companies out of business without firing a legal shot. See my article on the now infamous “Buckyball” case (cited below). In that matter, the SEC was handed a reversal by that very rare entity that chose to fight back. The problem, as pointed out in that article, was that by the time the Buckyballs’ founder “prevailed,” his company was out of business due to legal pressure put upon it by governmental enforcers. See Buckyballs.
In Ryan’s article about the SEC he, too, notes the apparent “guilty until proven innocent” approach taken by many governmental enforcers. It is compounded by the fact that any government enforcer holds not only powers over freezing assets and other kinds of relief (such as shut-down orders, bans-for-life, etc.) that are not available to non-governmental litigants, but the government most often enjoys much lower standards to obtain such enforcement mechanisms. I have written before on the unfairness of the government’s relative ease of obtaining restraining orders and other injunctive relief when compared to other civil defendants. See id. and “The FTC at 100: “Now DOJ, Jr.”
Additionally, given that governmental enforcers at the FTC often actually use their tremendous and asymetrical powers of a shut-down order, life-time bans and criminal enforcement (directly or through referral to the legal division, such as the U.S. Attorney’s office or Attorney General), government should be more, not less, circumspect in their public announcements — many of which read like PR propaganda. In this authors view, the Cinderella doctrine should be enforceable by sanctions, including terminating sanctions, against a governmental entity that makes pretrial PR claims. The government’s powers are too great and the potential damage to innocent targets too vast than to do otherwise. The FTC’s astonishing conviction rate of 99%, notwithstanding, the mere existence of the 1% of innocent targets more than justifies such a result.