(CN) – A financial news company committed securities fraud by selling investors an insider tip containing false claims about a uranium sales deal, the 4th Circuit ruled.
The editor of Pirate Investor LLC, Frank Porter Stansberry, sent an email advertising an insider stock tip about uranium trade between the United States and Russia, but the tip was false.
The Richmond, Va.-based court upheld a lower court’s ruling that Stansberry and his company violated SEC regulations by encouraging investors to buy the false tip for $1,000 and then urging them to buy stock in uranium enrichment company USEC Inc.
USEC started as part of the U.S. government, but went private and now buys uranium from Russia once slated for Soviet nuclear warheads and directs it to nuclear power plants in the United States.
When Stansberry heard that a uranium-pricing agreement was on the agenda for a summit between then-President George W. Bush and Russian President Vladimir Putin in May 2002, Stansberry called USEC’s director of investor relations.
After the interview, Stansberry sent an email “blast” claiming that a senior USEC executive said the deal would close May 22, though the director never gave Stansberry a date for the deal.
The actual agreement wasn’t announced until June 19.
Stansberry sold more than 1,200 copies of the false-tip report to investors, raking in $1 million in net profits, $626,500 of which went to Pirate.
The SEC investigated the incident, which led to a civil complaint accusing Stansberry, Pirate Investor and parent company Agora Inc. of securities fraud.
The 4th Circuit agreed with the district court that the email constituted fraud, because it was meant to get investors to buy shares. Pirate disputed this, saying the fraud ended when investors bought the report, and its involvement didn’t extend to actual trades. However, the court pointed out that the report said, “Call your broker now and tell him to buy shares of USEC.”
The false tip was made “in connection with” securities transactions, the court ruled, because it was sent to a targeted group of subscribers of online investment news. Pirate and Stansberry induced investors to purchase the report – and specifically USEC stock – using the claim of insider knowledge, the ruling states.
“[I]t would take an act of willful blindness to ignore the fact that appellants profited from the false statements,” the judges wrote.
The 4th Circuit also rejected Pirate’s claim that the SEC’s lawsuit had the effect of stifling free speech.
“Punishing fraud, whether it be common law fraud or securities fraud, simply does not violate the First Amendment,” the court wrote. The judges upheld an order requiring Pirate to disgorge all profits earned from the stock tip and barring the company from future violations.