Porter Stansberry delegated the writing on this investment promotion to an associate named Matt Badiali. He was editor of a Stansberry & Associates publication, pointedly titled "The Oil Report". But though the authorship was different to the Blast! which pumped VaxGen, the approach was essentially the same. From early 2006 onwards, they grabbed Stansberry punters with:
"The US Govt's Secret Colorado Oil Discovery."
An introduction followed to this 5,000-word document. And, as a journalist, I admired its drama:
"Hidden 1,000 feet beneath the surface of the Rocky Mountains lies the largest untapped oil reserve in the world — more than 2 TRILLION barrels. On August 8, 2005 President Bush mandated its extraction. Three companies have been chosen to lead the way. Test drilling has already begun..."
In short, the story was about deposits of the greasy, dark rock known as oil shale, in which the United States is notably rich. Focused most notably in a chunk of Colorado, Utah and Wyoming, known to geologists as the Green River Formation, it holds huge amounts of black gold, with some estimates claiming them to be the most extensive such deposits in the world.
"We have more oil inside our borders, than all the other proven reserves on earth," Matt Badiali tells us on behalf of Stansberry in The Oil Report. "Here are the official estimates:
• 8-times as much oil as Saudi Arabia
• 18-times as much oil as Iraq
• 21-times as much oil as Kuwait
• 22-times as much oil as Iran
• 500-times as much oil as Yemen
...And it's all right here in the Western United States."
In short, the report claims, there is more in these all-American shale beds than in the entire Middle East oil reserves. All it needs is drilling out and bringing to market, and everyone on the inside will make a bundle.
"U.S. Oil Shale Could Make You $551,900 in the Next Few Years"
Why $551,900? Well, I've no idea, and I'm sure they don't either, although the preciseness of the figure sounds authoritative. But, if it sounds too good to be true, it probably is. Don't forget: this is a story from Stansberry.
Here's more, of a different tone, worth keeping in mind in when evaluating this "secret" discovery:
"The occurrence of oil shale in the Green River Formation in Colorado, Utah and Wyoming has been known for many years."
"In 1967 the US Department of [the] Interior began an aggressive program to investigate the commercialization [of] the Green River oil-shale deposits."
"Today, few, if any, deposits of oil shale can be economically mined and processed for shale oil in competition with petroleum."
But those quotes are not found in the Stansberry & Associates report, despite apparent "months" of Matt Badiali's due diligence. They are taken from a 2003 paper published in the even-more-sharply-titled journal "Oil Shale" way back when Porter was touting VaxGen.
This paper, which spawned another by the same author from the United States Geological Survey (USGS) in 2005, explained that serious efforts had been made to exploit the rock-bound reserves, but investors had generally been burnt. One company, which pulled out in the 1980s spent $80 million sinking a 313 meter shaft and all the ancillary haulage paths, only to pull out when it just didn't pay.
"Although shale oil in today's (2004) world market is not competitive with petroleum, mineral gas or coal" observed the USGS report, "it is used in several countries that possess easily exploitable deposits of oil shale, but lack other fossil fuel resources."
If you really want to know, top of the list is Estonia. That powerhouse of the global economy.
But, of course, the issue here is the world price of oil. As that soars, shouldn't shale become competitive? Shouldn't market forces tip the balance in favour of the Stansberry tip, as, say, our old friend China stokes demand?
Well, let's see what happened to a Stansberry Associates investor, who took to the Agora subsidiary's path. This man accepted an invitation from Badiali to buy a $99-a-year subscription to The Oil Report, at the traditional 50% Stansberry discount.
For just $49.50, he got the promise of 12 issues of the publication, a special report titled "The U.S. Government's Secret Oil Supply: How to Make Money in the American Oil Shale Boom", another titled "The Government-Authorized Way to Get American Oil Royalties," and yet another titled "The Arctic Oil Boom - How to Get in Early on the World's Largest Deepwater Oil Field."
"In April 2006 I received an unsolicited email from the above talking about untapped oil in Green River, Colorado, Utah, etc. and stocks were recommended which they claimed 'will make you extremely rich' in a short time," he explained in a blog. "The mail, as you’ve seen many others like it, shouted loud claims of investments of the century, the Starbucks of energy stocks, get 500% return in 3 months, etc. etc. I don’t need to go into details to describe it because it’s 5 pages long."
He says he paid his money and, in May 2006 plonked a pile more on four stocks recommended in the report. They were Royal Dutch Shell (RDS.A:NYSE, US), which was then priced, he says, at 64.00/share; Gasco Energy Inc (GSX:AMEX, US) at 5.57/share; Infinity Energy Resources Inc (IFNY:OTC, US) 9.00/share; and Xcel Energy Inc (XEL:NYSE, US) 18.86/share.
In the face of the US government's secret Colorado oil discovery, you would expect to see the indeces for these stakes popping. But here are the results which the investor reported, denouncing Stansberry Associates as either "crooks" or "morons":
Royal Dutch Shell, which he had bought at $64, he said, "stayed at between $60 & $70 for a whole year, until 2007/05, hardly a star performance." He said it then went up to its highest of $87.83 in 2007/10, then closed at $46.14 in October 2008.
Gasco Energy, he said, dropped on Day One from the $5.57 he paid, to around $2.20 for the whole of 2007, with the lowest being $1.80 and the highest $2.75. Apparently, it then slowly climbed to $4.00 before plummeting to 83c in October 2008.
Infinity Energy did even worse. From the $9 he said he paid for it, it fell to $1.78 in the first four months of his investment, then to 28c in May 2005, before surging to a less-than-impressive 45c in October 2008.
There was some good news, however, from his last pick, Xcel Energy, which he bought at $18.86. This rose steadily to $24.67 in March, when our man should really have got out. For this, too, then slumped: to $16.50 in October 2008.
• RDS-A: one year = 0%; 2 years= –28%
• GSX: one year = -50%; 2 years= –85%
• IFNY: 4 months = -80%; one year = -97%; 2 years= –95%
• XEL: one year = +30%; 2 years= –12.5%
"Can performance get any worse than that?" this hapless Stansberry Associates customer concluded. "Even a monkey in Cambodia can pick 4 stocks and break even in 2 years."
Hey now. Steady on.
The SEC and Porter Stansberry
Which brings me to a source of the title of this commentary: Porter Stansberry, friend or fraud? How do these things tie together with the SEC's prosecution, and successful enforcement action against the tipster?
First, the facts, set out in various judgments, such as this one which identifies the scam. It concerned a “Super Insider Tip Email” distributed in May 2002, which promised that purchasers of a $1,000 "special report", written by one "Jay McDaniel".
"McDaniel", in fact, was a pseudonym for Porter Stansberry. The SEC was fascinated by that. And he claimed not only that he knew that name of a company which was about to be awarded a jaw-dropping government uranium-enrichment contract, but that if you too knew its identity and bought its stock at the right moment, you could "double your money".
Yes: double your money.
A federal judge sitting in Maryland district court, however, would later hear that there was no such tip, and that Stansberry's company, Pirate Investment LLC - already by the time of Porter's court appearance renamed Stansberry & Associates Investment Research - had sold 1,217 reports, scooping more than $1m from the scam.
"The Super Insider Solicitation and the Special Report contain numerous statements that were untrue," the judge said. “Some of the untrue statements may not be actionable. [For example, the use of the pseudonym "Jay McDaniel" or even the predictive nature of some statements.] However, the essential fraudulent element – the misrepresentation that the purveyor of the Special Report had a particular inside source for the precise date on which the stock price would rise – is definitely actionable."
Of course, the SEC rarely goes after stock tipsters. The cost-benefits of prosecutions are too uncertain. But so concerned had they become about the Stansberry operation that in his case they made an exception. I was even contacted myself by one of the SEC's investigators, who was hunting for the tipster's brokerage accounts.
As the newsletter Offshore Alert would report later, on May 13 2002, which was the day before the Stansberry tip was issued, trading volume of the touted company's stock was 49,900 shares, with a 30 day average of 127,080. On May 21, however, which was the day Stansberry said investors should buy the stock, trading volume was ten times the 30-day average, with no evidence of anybody else giving the tip.
But, of course, the whole thing was a scam, and a bunch of people got burnt. People like yourself, I would imagine. One investor lost between 20% and on quarter of his investment portfolio after buying stock and options in the company, and finally sold at a loss of about $28,000. That was when Stansberry issued another report saying that the company was not a recommended buy.
The district judge hearing the case, Marvin J Garbis, concluded that, in addition to the disgorgement of $1.3 million, including interest, by the Agora Inc subsidiary Pirate, Stansberry should personally pay $120,000 - the maximum penalty available to the court. The judge said that the defendant's conduct “undoubtedly involved deliberate fraud”, that he had “testified falsely at trial” and did not recognize his “financial culpability”.
The judge also entered an injunction prohibiting Stansberry and Pirate Investor from committing further securities fraud. “Defendants have not admitted the current fraudulent scheme,” Garbis said. “If Stansberry were to provide an assurance, that there would be no future violations, the court would not find him