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Is stock market commentary just free speech?

NY TIMES NEWS SERVICE, NEW YORK
Sunday, Aug 03, 2003, Page 12

"Here they said they had inside information about a specific deal. And the information was false."

Kenneth Israel, district administrator of the SEC's Salt Lake City office

It seemed like a pretty hot stock tip. About a year ago, thousands of subscribers to financial newsletters received an e-mail message claiming that a certain company's share price would double after an announcement at a summit meeting in St. Petersburg, Russia.

There was, of course, a catch. To learn the name of the company, recipients of the message would have to pony up US$1,000. In mid-May 2002, about 1,200 people did just that. Before long, trading volume surged and the company's stock price spiked. But the summit meeting came and went without the announcement, and the stock fell back down close to its original price.

The US Securities and Exchange Commission (SEC) has since sued the author of the e-mail message and his employer for securities fraud. If the suit is successful, it will be the first to use the securities laws against commentary about a company in which the authors had no financial stake.

The defendants are Frank Porter Stansberry and Agora Inc, which publishes books and newsletters in Baltimore and says it had more than US$100 million in sales last year. They have filed a motion to dismiss the suit, arguing that the First Amendment protects their publications no less than mainstream financial journalism.

Allowing the suit, they wrote in court papers, "would expose newspapers, broadcasts, news-letters, Web sites and every other form of communication about investment opportunities to the chill of civil liability under the nation's securities laws for the publication of any allegedly false statement."

Judge Marvin Garbis of US District Court in Baltimore will hear the motion this fall and may answer what another federal judge called an open and tantalizing question a quarter-century ago.

"Could there ever be a case where a newspaper which has no financial interest in a securities transaction could be found liable for a violation of" the securities laws "because of a false report bearing on securities offered for sale?"

Judge Charles Brieant asked in 1977. The question remains open.

Though one of the defining features of the laws governing securities fraud is that the false statements must be made "in connection with the purchase or sale of securities," the SEC concedes in court papers that the defendants never owned the stock of the company that they talked about. Their fraud was, according the SEC, a more conventional one: they lied about the product they sold. Because that lie concerns a security, the SEC says, it amounts to securities fraud.

An SEC official said that comparisons to more conventional journalism were misguided.

"A Money magazine article about `10 Stocks to Buy Tomorrow,'" said Kenneth Israel Jr., the district administrator of the SEC's Salt Lake City office, which is bringing the suit, "is based just on analysis of the companies, whereas here they said they had inside information about a specific deal. And the information was false."

Stansberry's e-mail message and the report it marketed did indeed refer to inside information. But his lawyers say that he used the term in a colloquial and descriptive sense rather than a legal one, and they note that the SEC has not alleged any illegal trading.

The e-mail message itself described information about an impending deal passed along to Stansberry by "a high-level corporate executive-someone definitely in a position to know."

Investors willing to pay US$1,000 learned the name of the company: USEC Inc, a Maryland company that supplies enriched uranium fuel to commercial nuclear power plants. It buys weapons-grade uranium taken from dismantled Russian nuclear warheads. Stansberry's report predicted that a new pricing agreement between USEC and a Russian counterpart would be approved at the summit meeting on May 22 of last year.

Stansberry eventually revealed that his source had been Steven Wingfield, the company's director of investor relations.

In a deposition, Wingfield acknowledged talking with Stansberry and discussing the meeting in St. Petersburg between US President George W. Bush and Russia President Vladimir Putin. But he denied giving him specific information.

"I don't remember my words precisely," Wingfield said, "but I think that the answer I gave him was that the agreement needed to be approved by the US and Russian governments and those were the presidents of those governments and the matter could come up."

Stansberry's report was more premature than inaccurate. The predicted deal did materialize, on June 19 of last year, but the stock price did not move significantly in reaction to it. The day before, after the deal cleared a hurdle with the Energy Department, the stock did rise 12 percent.

"So Stansberry was five weeks late, and that's a federal case?" asked Matthew Turner, a lawyer at Agora.

People who bought the stock in the week after Stansberry's report became available paid US$7.61 to US$10.20 a share. When the deal failed to materialize on May 22 of last year, the share price fell to US$8.20 from US$9.10. Those who bought at the top might have lost a bit of money, Agora's lawyers said, but there were no significant financial losses.

A spokeswoman for USEC had little to say about the lawsuit or Stansberry.

"We did see the false statements," said the spokeswoman, Mari Angeles Major-Sosia. "We advised our investors that he did not have correct information. But USEC is not involved in the lawsuit. It's the SEC's role to correct his actions."

Stansberry was traveling in Europe last week and was unavailable for comment. One of his lawyers, Bruce Sanford, praised his enthusiasm.

"He's a young, creative guy," Sanford said. "He's got a lot of hustle. His language is not the sort of bland analysis you might expect from a Wall Street investment house or a dispassionate report in a daily newspaper. It's the excitement, the enthusiasm, the fun you get with investment newsletters."

Stansberry, 30, described his qualifications at his deposition.

"I worked at various times in college in the fields of pizza delivery and lifeguarding," he said. He started at Agora in 1996 as a file clerk.

Turner, the lawyer at Agora, said that 200 people who bought the report asked for and got their money back.

"Unlike the SEC," he said, "not one single customer has even so much as threatened a lawsuit."
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