U.S. S.E.C. v. Pirate Investor LLC

580 F.3d 233

UNITED STATES SECURITIES AND EXCHANGE COMMISSION, Plaintiff-Appellee, v. PIRATE INVESTOR LLC; Frank Porter Stansberry, Defendants-Appellants, and Agora, Incorporated, Defendant James Dale Davidson, Intervenor/Defendant Forbes, LLC; Hearst Corporation; Tribune Company (including the Baltimore Sun); Eagle Financial, Incorporated; Investorplace Media, LLC; American Society of Newspaper Editors; California First Amendment Coalition; Radio-Television News Directors Association; Reporters Committee for Freedom of the Press; Society of Professional Journalists; Thomas Jefferson Center for the Protection of Free Expression, Amici Supporting Appellants.

No. 08-1037.

United States Court of Appeals, Fourth Circuit.

Argued December 2, 2008.

Decided September 15, 2009.

ARGUED:

Bruce D. Brown, Baker & Hostetler, L.L.P., Washington, D.C., for Appellants. Michael Conley, United States Securities & Exchange Commission, Washington, D.C., for Appellee.

ON BRIEF:

Bruce W. Sanford, Lee T. Ellis, Jr., Laurie A. Babinski, Baker & Hostetler, LLP., Washington, DC; Matthew J. Turner, Baltimore, Maryland, for Appellants. Brian G. Cartwright, General Counsel, Andrew N. Vollmer, Deputy General Counsel, Jacob H. Stillman, Solicitor, Mark Pennington, Assistant General Counsel, Rada L. Potts, Senior Litigation Counsel, Securities & Exchange Commission, Washington, D.C., for Appellee. Walter Dellinger, Mark S. Davies, Allison Orr Larsen, O'Melveny & Myers, LLP., Washington, D.C.; Kai Falkenberg, Editorial Counsel, Forbes, L.L.C., New York, New York; Eve Burton, Jonathan Donnellan, The Hearst Corporation, New York, New York; David S. Bralow, Assistant General Counsel, Tribune Company, East Coast Publishing, New York, New York; Lucy A. Dalglish, Gregg P. Leslie, The Reporters Committee for Freedom of the Press, Arlington, Virginia; Kevin M. Goldberg, American Society of Newspaper Editors, Arlington, Virginia; Kathleen A. Kirby, The Radio-Television News Directors Association, Washington, D.C.; Robert M. O'Neil, Josh Wheeler, The Thomas Jefferson Center for the Protection of Free Expression, Charlottesville, Virginia, for Amici Supporting Appellants.

Before WILLIAMS, Chief Judge,^* and NIEMEYER and MOTZ, Circuit Judges.

Affirmed by published PER CURIAM opinion.

OPINION

PER CURIAM:

Frank Porter Stansberry and Pirate Investor LLC (collectively, "Appellants") offered and sold an e-mail stock tip. The offer and the tip contained representations that information in both documents was the product of conversations with a senior executive inside the company that was the focus of the tip. After conducting a bench trial, the district court concluded that the representations concerning the source of information in the e-mail stock tip were false, and it determined that Appellants had violated Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C.A. § 78j(b) (West 2009), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (2008), by offering and selling the stock tip. The district court ordered disgorgement of Appellants' profits from the sales of the stock tip, imposed civil penalties, and issued an injunction against future violations of Section 10(b) and Rule 10b-5.¹ Appellants argue that the facts of this case do not support the district court's finding of liability, and that the injunction against future violations of § 10(b) is overbroad. For the following reasons, we affirm.

I.

Pirate Investor LLC is a Maryland limited liability company that publishes investment newsletters.² Pirate also provides an e-mail service to its subscribers called the "Blast." Pirate is wholly owned by Agora, Inc., a Maryland corporation that publishes books, magazines, and newsletters covering a wide range of topics.³ Stansberry is the editor-in-chief of Pirate, and in this capacity he writes and publishes investment newsletters.

Sometime in April 2002, Stansberry became aware of a company called USEC, Inc. USEC is a provider of uranium-enrichment services that began as an arm of the United States government.⁴ The company currently is the executive agent of the United States government under a disarmament pact that was signed between the United States and Russia in 1993. Under the pact, known as "Megatons to Megawatts," Russia sells uranium that was formerly used in Soviet nuclear warheads to the United States for use as fuel in nuclear power plants. The pact further requires USEC and OAO Techsnabexport ("Tenex"), its Russian counterpart, to periodically renegotiate the price of the uranium. Any new pricing agreement is subject to approval by both the United States and Russian governments. The pricing agreement between USEC and Tenex expired at the end of 2001, and the two companies negotiated a new agreement in February of 2002. Neither the Russian nor the United States governments had approved this new agreement as of May 2002, however, and USEC requested that the United States government place the pricing agreement on the agenda for a summit between President George W. Bush and Russian President Vladimir Putin that was planned for that month.

After becoming aware of the circumstances surrounding USEC's pricing agreement, Stansberry contacted Steven Wingfield, USEC's Director of Investor Relations, and on May 2, 2002, conducted a telephone interview with Wingfield. This case revolves around two communications —a special report on USEC ("USEC Special Report") and a solicitation hawking that report ("Super Insider Tip E-mail")— that Stansberry prepared following that telephone conversation.

The Super Insider Tip E-mail was a promotional document calling on investors to "DOUBLE YOUR MONEY ON MAY 22ND WITH THIS `SUPER INSIDER' TIP." (J.A. at 2972.) Specifically, the document purported to contain information obtained from "a senior company executive" that would allow investors to know exactly when "a major international agreement between the United States and Russia" would be concluded, resulting in substantial profits for a particular U.S. company. (J.A. at 2972.) The document identified May 22 as the day the deal would close and inveigled investors with assurances that "[t]his is the kind of insider information that could make you a lot of money." (J.A. at 2972-73.)

The Super Insider Tip E-mail also included some back ground on the company, as well as details of how the upcoming deal would benefit the company.⁵ The document did not provide the name of the company. For that nugget of information, investors were told that they would have to pay $1,000. Stansberry signed the e-mail under the pseudonym "Jay McDaniel."⁶

Those who responded to the Super Insider Tip E-mail and paid $1,000 would receive the USEC Special Report. This communication identified USEC as the company referenced in the Super Insider Tip E-mail. The USEC Special Report engaged in a financial analysis of USEC's fundamentals and discussed its role as the United States' agent under the 1993 disarmament pact. It observed that USEC had reached an agreement with its Russian partner regarding a market-based pricing agreement for nuclear fuel, but cautioned that "implementation of the agreement is subject to review and approval by the U.S. and Russian governments." (J.A. at 3111.) The USEC Special Report then repeated the claim made in the Super Insider Tip E-mail that: "A USEC senior executive has assured me that the new Russian agreement will be approved prior to the upcoming Bush-Putin summit. In fact, he said `watch the stock on May 22nd.'" (J.A. at 3111.)

On May 13, 2002, Stansberry sent the Super Insider Tip E-mail to the Pirate Investor Blast Database, a list of e-mail addresses of subscribers to Pirate products. After an initial favorable response,⁷ Stansberry caused the Super Insider Tip E-mail to be sent to numerous other electronic databases associated with Agora products, as well as at least one database that had no affiliation with Agora. Ultimately, over 800,000 individuals received the Super Insider Tip E-mail. Investors purchased 1,217 copies of the USEC Special Report, resulting in net proceeds of $1,005,000. Pirate received $626,500 of that sum.

Of course, what investors did not know, and what became the focus of the SEC's case against Stansberry and Pirate, was that Wingfield had never told Stansberry that approval of the USEC-Tenex pricing agreement would be announced on May 22.⁸ Indeed, nothing was announced on May 22, and the pricing agreement was ultimately announced on June 19, 2002. On April 18, 2003, the United States Securities and Exchange Commission ("SEC") filed a civil complaint charging Agora, Pirate, and Stansberry with securities fraud under § 10(b) of the Securities Exchange Act of 1934. Following a bench trial, the district court concluded that Appellants violated § 10(b) by falsely claiming that a company insider provided the information in the Super Insider Tip E-mail and the USEC Special Report. Appellants were held jointly and severally liable for disgorgement of the profits of the scheme, plus prejudgment interest. Civil penalties were also imposed on Appellants, and the district court entered a permanent injunction enjoining them from further violations of § 10(b).⁹ Appellants timely appealed, raising three issues: (1) whether the conduct in this case constituted a violation of § 10(b); (2) whether, if the conduct here does fall within the purview of § 10(b), the First Amendment entitles Appellants to the heightened protections it affords the media in other contexts; and (3) whether the permanent injunction entered by the district court is an improper prior restraint on speech.

II.

We begin with Appellants' claim that their conduct did not constitute a violation of § 10(b). In a civil enforcement action under § 10(b), the SEC must establish that the defendant "(1) made a false statement or omission (2) of material fact (3) with scienter (4) in connection with the purchase or sale of securities."¹⁰ McConville v. SEC, 465...