For all the oddness about this interpretation, Stansberry wasn't without wider support. "The Supreme Court has long held that newspapers and other publications have the right to be wrong, as long as they did not err deliberately or with negligence," commented The New York Times on the tipster's predicament. "As Justice Lewis F Powell Jr wrote in 1974, 'the First Amendment requires that we protect some falsehood in order to protect speech that matters.'"
By the Times's reckoning, "Mr Stansberry’s actions might seem unorthodox or even unethical by the standards of most reputable publishers, but that does not make them illegal. The implications of the SEC’s action are potentially profound: newspapers or Web sites promising their paying readers stock information that later turns out to be untrue suddenly leave themselves open to fraud charges. Any financial commentator who passes on bad information in good faith could be sued."
The courts' rulings
But this wasn't the view of judges as the Stansberry case plodded through federal courts. In August 2007, 28 months after a bench trial of the case, US district judge Marvin J Garbis found Stansberry and Pirate jointly liable for actions which he said “undoubtedly involved deliberate fraud” and in Stansberry's conduct involved “making statements that he knew to be false”. Garbis added that Stansberry had “testified falsely at trial” and, despite the evidence, did not recognize his “financial culpability”.
Ordering the disgorgement of $1.5 million in profits and the payment of two $120,000 fines, Garbis noted the casualties of the Stansberry scam. At least one investor lost up to a quarter of his investment portfolio after buying USEC stock and options in line with Stansberry's information. That investor finally sold his stock, losing some $28,000, in August of 2002 when a new special report from Stansberry said that USEC stock was no longer a good long-term investment.
Another investor who bought the $1,000 report told the court that he'd sold other investments and borrowed money to buy 7,500 USEC shares, thinking he would double his money after May 22. He lost about $7,200 when he eventually sold the stock.
“Stansberry and Pirate were intimately involved in perpetrating the fraud at issue. Stansberry drafted the Super Insider Solicitation using a Pirate author’s pseudonym, utilized Pirate’s mailing list and newsletter, had sales of the Special Report, had Pirate receive the proceeds and keep the majority for itself," the judge said.
“Furthermore, Stansberry testified that he received a bonus that was a percentage of Pirate’s net income, and that in 2002, the year of this fraud, he 'made substantially more.' He was unable to recall his specific bonus in 2002, estimating that it ranged from between $200,000 and $400,000. Stansberry profited handsomely from Pirate’s gain from the fraudulent scheme.”
Porter Stansberry appeals
As you might imagine from The New York Times's intervention, there's a whole lot of law behind all this. Should Porter Stansberry's false claims be exempt from sanction on grounds that his speech was protected? That was plainly his view, and he also asserted that his errors were not intentional. To override the presumption of free speech, the wrongs would have to be intentional, or at least reckless. The district court was in no doubt: it was fraud.
But Stansberry and Pirate appealed, with the case argued on 2 December 2008, and judgment given on 15 September 2009. Three senior judges on the fourth circuit heard the matter, with two taking part in the decision. At issue was largely whether Stansberry had acted deceptively.
Appearing in the action with amici submissions were a galaxy of media organisations, come to support the newsletter editor. Among them were Forbes, Hearst, the Tribune company, the American Society of Newspaper Editors, the Radio-Television News Directors Association, the Society of Professional Journalists and the Center for the Protection of Free Expression.
But, ominously for the outcome, circuit judges Niemeyer and Motz noted early in their ruling:
"The district court found that Wingfield never told Stansberry that approval of the pricing agreement would be announced on May 22, and the Appellants do not challenge that finding on appeal."
You would think, then, deception was proved. That would seem to void any free speech defence, since Stansberry was found to have intended to mislead. And indeed that was the bench's view, which rejected the media arguments, along with those of the appellants that the issue in question was the claim that the share price would rise - evidently a matter of opinion that any prosecution would find it hard to go behind.
"The amici suggest that the district court premised its finding of liability on Appellants’ claim that USEC’s stock price would rise on a particular day — May 22 — and that such a prediction about a stock price change "is not an ‘actual fact’ but an ‘opinion’ that can never be a ‘false’ statement for purposes of the securities laws," the judges noted. "This argument ignores the plain language of the district court’s opinion, which clearly shows that the district court based its liability determination, not on the prediction itself, but on Appellants’ claims that the prediction was the result of a conversation with a company insider."
As Judge Garbis had previously ruled:
"The Court finds that the SEC has established that the Super Insider Solicitation and the Special Report include actionable false statements — to the effect that the author was basing his statement as to a May 22, 2002 rise in stock price upon statements made to him by a senior executive of USEC in a position to know when the price agreement would be approved."
Much else was considered, but here was the nub of it: the "insider information" about the date was a lie. That Wingfield's evidence, accepted by Garbis, was left unchallenged meant any free speech defence was lost. There was no legal protection for the intentionally false claim that Stansberry had been given the date by the USEC executive. "Punishing fraud," the circuit judges ruled, "whether it be common law fraud or securities fraud, simply does not violate the First Amendment."
And there was plenty more where that came from. The circuit judges lambasted Stansberry.
"In addition, the record shows that Appellants were not only
relying on the rise in USEC’s stock price to boost the credibility
of this particular stock recommendation. They expected
that the rise in USEC’s price would lead to a general increase
in Appellants’ reputation as trusted purveyors of internet
investment advice. The fraud’s ultimate success involved not
only the $1,000 purchase price, but also the boost in reputation
that would accrue with those who purchased stock in reliance on the report — a reputational gain that would lead to future purchases of future reports on different companies. As Stansberry noted in an e-mail, '[i]f we’re able to sell this to
250 people and it works, we’ll be able to charge almost what ever we want next time.'"