Stansberry can move stocks but he is pretty much a one step above a penny stock pump and dump promoter.
---
U. S. JUDGE FINES AGORA SUBSIDIARY AND EDITOR $1.5 M FOR SECURITIES FRAUD
An investment newsletter’s publisher and its editor have been hit with $1.5 million in financial penalties after a U. S. federal judge determined they defrauded their own subscribers in a securities scam.
Judgment in favor of the Securities Exchange Commission and against Maryland-based Pirate Investor LLC, now called Stansberry & Associates Investment Research, LLC, and Frank Porter Stansberry was issued at the U. S. District Court for the District of Maryland on August 1, 2007 – 28 months after the completion of a bench trial. The penalty comprises disgorgement of $1.3 million in profits and interest from the fraudulent activity, for which Pirate Investor and Stansberry are jointly and severally liable, plus a fine of $120,000 against each defendant.
U. S. District Judge Marvin J. Garbis found in favor of a third defendant, Pirate Investor’s parent, Agora, Inc., determining that it could not be held liable for the fraudulent statements of its subsidiary simply “by virtue of its ownership and ability to control Pirate”. There was no evidence that Agora, as opposed to Pirate, directly made the false statements at issue, determined Judge Garbis.
The SEC had accused the defendants of fraud concerning a “Special Report” authored by Stansberry, using the pseudonym ‘Jay McDaniel’, about publicly-listed uranium enrichment services provider USEC, Inc. and a promotional “Super Insider Tip Email” offering the Special Report for sale that was distributed on May 14, 2002, after which Pirate Investor sold 1,217 reports for $1,000 each.
The promotional material offered purchasers of the report the opportunity to “double your money” by acting on “inside tips” that Stansberry had obtained from a “senior executive inside the company”, according to the SEC. However, the SEC alleged that the report, which included a claim that Government approval for a lucrative new pricing agreement involving USEC would be announced on May 22, was replete with lies and the judge agreed.
“The Super Insider Solicitation and the Special Report contain numerous statements that were untrue,” he commented. “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.”
Report purchasers were informed that USEC was due to sign a lucrative contract, that the deal would be announced on May 22, 2002, and that this would cause its share price to “skyrocket”, stated the judge. However, after the date came and went without any such announcement, “many individuals who purchased the USEC report” requested refunds from the defendants and “many investors posted negative sentiments” on the defendants’ own message boards, noted the judge. Pirate customer service representative Elyssa Yankelov testified that “Pirate had never had so many complaints about a report prior to the USEC Special Report”, noted the judge.
Even USEC, which was not involved in the fraud, received telephone calls from buyers of the report who “demanded to know” when the deal was coming and “were angry that USEC had not made the promised announcement”, stated the judge.
Pirate Investor’s promotional had a significant impact on USEC’s share price and the volume of shares traded, he observed. On May 13, 2002, the day before the Super Insider Solicitation, the trading volume of USEC’s stock was 49,900 shares, and the average volume of the previous 30 days was 127,080 shares. On May 21, 2002, “the day that the Super Insider Solicitation had identified for investors to purchase USEC stock”, the trading volume was “ten times larger than the 30-day average”. The judge added: “Defendants have presented no evidence that any other newsletter writer, journalist or investment advisor had pegged May 21 as an important buy day for USEC.”
He continued: “The gravity of the harm in this case is not limited to the amount of money each purchaser spent for the Special Report. Approximately 1,217 investors bought the Special Report with the expectation, as promised by the Super Insider Solicitation, that they would double their investment dollars if they just followed the “insider” information contained within the Special Report.
“At least one investor lost approximately 20 to 25% of his investment portfolio after purchasing USEC stock and options between May 13 and 22. That investor finally sold his stock, after May 22 came and went without the anticipated announcement, in August of 2002 when Stansberry indicated in a new special report to investors that USEC stock was no longer a good long-term investment. The investor lost about $28,000.
“Although the investor eventually received a refund of the $1,000 Special Report purchase price, that refund was not offered to him by Defendants. Rather, he learned that other purchasers of the Special Report had been offered refunds after reading about the SEC action against Defendants on the Internet. It was then that he contacted Pirate and requested and received a refund of the $1,000 purchase price.
“Another investor who purchased the USEC Report for $1,000 testified that he sold other investments and borrowed money on a credit card in order to purchase 7,500 shares of USEC stock with the expectation that he would double his money after May 22. That investor lost approximately $7,200 when he eventually sold the stock, two months after the approval of the new pricing agreement was supposed to have been announced. He was never offered a refund of the purchase price of the USEC. Although that investor tried on a number of occasions to get answers to specific questions about the status of USEC stock and the non-existent May 22 announcement, Stansberry merely responded that he could not give individualized investment advice.
“Investors certainly lost more than the $1,000 purchase price of the USEC Report. While Defendants reaped approximately $1 million in revenue from the sale of 1,217 copies of the Special Report, the losses to investors no doubt greatly exceeded that amount.”
When calculating the amount of the profits he should order Stansberry and Pirate to disgorge, Judge Garbis stated: “Pirate sold 1,217 copies of the Special Report at $1,000 per report, and reimbursed 215 purchasers of the Special Report, refunding a total of $215,000. Thus, Pirate’s net receipts for the sale were $1,002,000.Stansberry testified that he received a commission from Pirate for the Special Report sale in the amount of $200,400. Therefore, the profit “causally connected to the violation” was $200,400 for Stansberry and $801,600 for Pirate.”
The judge considered it “appropriate to hold Stansberry and Pirate jointly and severally liable for disgorgement of the entire amount”, noting Stansberry’s testimony that “he ran the ‘show’ and was the “person in charge” of Pirate.
“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.
“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.”
In coming to the conclusion that Stansberry should receive the $120,000 maximum fine for an individual that he was allowed to give, the judge noted that Stansberry’s conduct “undoubtedly involved deliberate fraud” and “making statements that he knew to be false;”. Judge Garbis determined that Stansberry 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,” stated the judge. “If Stansberry were to provide an assurance, that there would be no future violations, the Court would not find him particularly credible. The existence of an injunction against future fraudulent schemes of the type involved here will provide a needed measure of security against recidivism. The Court finds, after weighing the relevant factors, that there is ample evidence of a “reasonable and substantial likelihood” that Defendants will violate securities laws in the future, absent an injunction.”
Pirate Investor and Stansberry have announced their intention to appeal the judgment.
A cornerstone of their unsuccessful defense was that they were protected by the First Amendment of the U. S. Constitution, which protects free speech. In his judgment, Judge Garbis stated: “There is no doubt that each of the Defendants was engaged in the production and distribution of publications entitled to substantial First Amendment protection. However, as discussed herein, the instant case does not relate to such publications. Rather, the instant case relates to a fraud scheme whereby victims were induced to pay $1,000 each for a “sure thing” stock tip allegedly based upon “inside information” presented separately from Defendants’ regular publications.” He held that the comments were not “pure speech” but “commercial speech”, which entitled them to lesser First Amendment protection. Referring to case law, Judge Garbis stated that, n order to receive First Amendment protection, commercial speech “must be neither misleading nor related to unlawful activity” and, therefore, Stansberry and Pirate were not entitled to receive such protection.
