Friday, February 5, 2016

porter stansberry agora inc fraud protected as 'free speech'

Page 1
No. 08-1037
Defendants - Appellants,
(including the Baltimore Sun);
Amici Supporting Appellants. 
Appeal from the United States District Court
for the District of Maryland, at Baltimore.
Marvin J. Garbis, Senior District Judge.
Argued: December 2, 2008
Decided: September 15, 2009
Before WILLIAMS, Chief Judge,* and NIEMEYER and
MOTZ, Circuit Judges.
*Chief Judge Williams heard oral argument in this case but did not par-
ticipate in the decision. The decision is filed by a quorum of the panel pur-
suant to 28 U.S.C. § 46(d).
Affirmed by published per curiam opinion.
L.L.P., Washington, D.C., for Appellants. Michael Conley,
SION, Washington, D.C., for Appellee. ON BRIEF: Bruce
W. Sanford, Lee T. Ellis, Jr., Laurie A. Babinski, BAKER &
HOSTETLER, L.L.P., Washington, D.C.; Matthew J. Turner,
Baltimore, Maryland, for Appellants. Brian G. Cartwright,
General Counsel, Andrew N. Vollmer, Deputy General Coun-
sel, Jacob H. Stillman, Solicitor, Mark Pennington, Assistant
General Counsel, Rada L. Potts, Senior Litigation Counsel,
D.C., for Appellee. Walter Dellinger, Mark S. Davies, Allison
Orr Larsen, O’MELVENY & MYERS, L.L.P., 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. Dal-
FOR FREEDOM OF THE PRESS, Arlington, Virginia;
PER EDITORS, Arlington, Virginia; Kathleen A. Kirby, THE
TION, Washington, D.C.; Robert M. O’Neil, Josh Wheeler,
ginia, for Amici Supporting Appellants.
Frank Porter Stansberry and Pirate Investor LLC (collec-
tively, "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 fol-
lowing reasons, we affirm.
Pirate Investor LLC is a Maryland limited liability com-
pany that publishes investment newsletters.Pirate also pro-
vides an e-mail service to its subscribers called the "Blast."
Pirate is wholly owned by Agora, Inc., a Maryland corpora-
1"The scope of Rule 10b-5 is coextensive with the coverage of § 10(b)."
SEC v. Zandford, 535 U.S. 813, 816 n.1 (2002). Accordingly, we will use
"§ 10(b)" to refer to both the statute and the rule. See SEC v. Wolfson, 539
F.3d 1249, 1256 n.11 (10th Cir. 2008).
2We view the facts in the light most favorable to the prevailing party
below, in this case the SEC. See Wharf (Holdings) Ltd. v. United Int’l
Holdings, Inc., 532 U.S. 588, 590 (2001); Taylor v. First Union Corp.,
857 F.2d 240, 245 (4th Cir. 1988).
tion that publishes books, magazines, and newsletters cover-
ing a wide range of topics.Stansberry is the editor-in-chief
of Pirate, and in this capacity he writes and publishes invest-
ment newsletters.
Sometime in April 2002, Stansberry became aware of a
company called USEC, Inc. USEC is a provider of urani-
um-enrichment services that began as an arm of the United
States government.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 Techsna-
bexport ("Tenex"), its Russian counterpart, to periodically
renegotiate the price of the uranium. Any new pricing agree-
ment is subject to approval by both the United States and Rus-
sian 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 Wing-
3Along with Stansberry and Pirate, Agora was an original defendant in
the SEC’s action. The district court rejected the SEC’s theory that Agora,
as the parent company of Pirate, was also liable for any wrongdoing com-
mitted by Stansberry and Pirate, and the SEC has not appealed that ruling.
4USEC was privatized in July of 1998.
field. This case revolves around two communications — a
special report on USEC ("USEC Special Report") and a solic-
itation hawking that report ("Super Insider Tip E-mail") —
that Stansberry prepared following that telephone conversa-
The Super Insider Tip E-mail was a promotional document
calling on investors to "DOUBLE YOUR MONEY ON MAY
Specifically, the document purported to contain information
obtained from "a senior company executive" that would allow
investors to know exactly when "a major international agree-
ment between the United States and Russia" would be con-
cluded, 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 upcom-
ing deal would benefit the company.The document did not
5The e-mail also contained several flippant remarks. The e-mail’s com-
mentary on the nature of politics is particularly noteworthy:
See how this works? It’s a total insider deal. Money and favors
in exchange for a fat deal with the Russians. Hey, I know it’s
dirty. But I don’t make the rules and I don’t run the company or
involve myself in politics. On the other hand, I see nothing wrong
with profiting from my insider knowledge of this deal and I don’t
think you should be ashamed to do so either.
. . . .
And guess what? The deal with the Russians has ALREADY
BEEN SIGNED. That’s right. It’s all done, locked up. Finished.
The only thing that both sides are waiting on is the proper media
event to announce this commercial cooperation between the Rus-
kies and us. It’s a feel good thing. It’s PR for the politicians. You
know how the game works.
(J.A. at 2974-75.) Despite the tip’s suggestion that the author was also
profiting from the information, "[a]t no time relevant to this case did Stan-
sberry, Pirate Investor, or Agora own or trade in the stock of USEC." (J.A.
at 124.)
provide the name of the company. For that nugget of informa-
tion, investors were told that they would have to pay $1,000.
Stansberry signed the e-mail under the pseudonym "Jay McDan-
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 "imple-
mentation 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,Stansberry caused the Super Insider Tip
E-mail to be sent to numerous other electronic databases asso-
ciated 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
6In fact, "Jay McDaniel" was the pen name of Raymond Madron, an
independent contractor for Pirate who wrote a weekly promotional piece
advertising Agora products or services.
7One hundred seven USEC Special Reports were sold in the initial 24
hours after submission of the Super Insider Tip E-mail to the Pirate Inves-
tor Blast database.
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.Indeed, nothing was announced on May 22, and the pric-
ing 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 infor-
mation 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).Appellants timely
appealed, raising three issues: (1) whether the conduct in this
case constituted a violation of § 10(b); (2) whether, if the con-
duct 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 per-
manent injunction entered by the district court is an improper
prior restraint on speech.
8In the proceedings before the district court, Stansberry adhered to his
claim that Wingfield did, in fact, suggest that approval of the pricing
agreement would be announced on May 22. The district court found, how-
ever, that Wingfield made no such statements. Stansberry and Pirate do
not challenge this particular factual finding on appeal.
9By order dated February 28, 2008, a panel of this court stayed the
injunction pending appeal.
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 secur-
ities."10 McConville v. SEC, 465 F.3d 780, 786 (7th Cir.
2006). The SEC bears the burden of establishing each element
by a preponderance of the evidence. Herman & MacLean v.
Huddleston, 459 U.S. 375, 387-91 (1983) (preponderance of
the evidence standard applies to § 10(b) actions). We address
each element in turn.
Section 10(b) requires that a defendant act deceptively in
order to fall within the coverage of the statute. Santa Fe
Indus., Inc. v. Green, 430 U.S. 462, 473 (1977) ("The lan-
guage of § 10(b) gives no indication that Congress meant to
prohibit any conduct not involving manipulation or decep-
tion."). Deceptive acts include misstatements, omissions by
those with a duty to disclose, manipulative trading practices,
and deceptive courses of conduct. Stoneridge Inv. Partners,
LLC v. Scientific-Atlanta, Inc., 128 S. Ct. 761, 769 (2008).
The facts of this case easily satisfy this element. 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. Thus,
Appellants’ representations that they based their predictions
10Unlike private litigants, the SEC need not prove the additional ele-
ments of reliance or loss causation. See SEC v. Rana Research, Inc., 8
F.3d 1358, 1364 (9th Cir. 1993) ("The SEC need not prove reliance in its
action for injunctive relief on the basis of violations of section 10(b) and
Rule 10b-5."); SEC v. Blavin, 760 F.2d 706, 711 (6th Cir. 1985) ("Unlike
private litigants seeking damages, the Commission is not required to prove
that any investor actually relied on the misrepresentations or that the mis-
representations caused any investor to lose money.").
on information obtained from a source within USEC were
misstatements of fact.11
It is not enough, however, for the SEC to point to a false
statement — the misrepresentation must concern a material
fact. See Basic Inc. v. Levinson, 485 U.S. 224, 238 (1988) ("It
is not enough that a statement is false or incomplete, if the
misrepresented fact is otherwise insignificant."); Greenhouse
v. MCG Capital Corp., 392 F.3d 650, 656 (4th Cir. 2004)
("The plain language of Rule 10b-5 . . . requires any success-
ful securities-fraud suit to allege a fact that is both untrue and
material."). We have adopted the following standard for
addressing materiality:
[A] fact stated or omitted is material if there is a sub-
11On this point, we believe that the concerns raised by the amici are
entirely illusory. The amici suggest that the district court premised its find-
ing 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." (Amici Br. at 20.)
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:
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 state-
ments made to him by a senior executive of USEC in a position
to know when the price agreement would be approved.
(J.A. at 158.) Claims regarding the source of information are not expres-
sions of subjective opinion, but are representations of an objectively veri-
fiable fact. Cf. Miller v. Asensio & Co., 364 F.3d 223, 228 n.3 (4th Cir.
2004) ("The statements cannot be dismissed as unverifiable opinion; they
set forth or were grounded in actual past or present facts, which Plaintiffs
demonstrated to be false." (internal citation marks omitted)).
stantial likelihood that a reasonable purchaser or
seller of a security (1) would consider the fact
important in deciding whether to buy or sell the
security or (2) would have viewed the total mix of
information made available to be significantly
altered by disclosure of the fact.
Longman v. Food Lion, Inc., 197 F.3d 675, 683 (4th Cir.
1999). Determining whether the facts of a particular case meet
this standard "requires delicate assessments of the inferences
a ‘reasonable shareholder’ would draw from a given set of
facts and the significance of those inferences to him, and
these assessments are peculiarly ones for the trier of fact."
TSC Indus., Inc. v. Northway, Inc., 426 U.S. 438, 450 (1976).
Accordingly, we review for clear error the district court’s
determination, made after a bench trial, that Appellants’ mis-
representations were material. See Miller v. Thane Int’l, Inc.,
519 F.3d 879, 888 (9th Cir. 2008) (reviewing district court’s
findings on materiality for clear error); SEC v. Merchant Cap-
ital, LLC, 483 F.3d 747, 754 (11th Cir. 2007) (same); Lawton
v. Nyman, 327 F.3d 30, 42 (1st Cir. 2003) (same); SEC v.
Maio, 51 F.3d 623, 637 (7th Cir. 1995) (same).
Applying that standard, we see no clear error in the district
court’s finding of materiality. Appellants promised investors
that the information they were receiving was the product of a
conversation with a company insider. The materiality determi-
nation thus turns on whether the reasonable investor would
treat a particular stock recommendation differently depending
on whether or not the recommender was acting on inside
information. We fail to see any clear error in the district
court’s determination that an investor would consider this
question important in deciding whether to purchase the rec-
ommended security.12 Cf. Va. Bankshares, Inc. v. Sandberg,
12Appellants’ arguments on appeal fail to address this point. Rather,
they attempt to find error in the district court’s consideration of stock price
evidence to support its materiality finding, because there was an abun-
501 U.S. 1083, 1090-91 (1991) (noting that statements by
directors raise "no serious question" of materiality because
directors "usually have knowledge and expertness far exceed-
ing the normal investor’s resources"). Moreover, purchasers
of the USEC Special Report testified that it was important to
them that the information conveyed in the report came from
a source inside USEC, and that this characteristic influenced
them to purchase the report and, subsequently, USEC stock.
See Harris v. Union Elec. Co., 787 F.2d 355, 366-67 (5th Cir.
1986) (finding no error in jury determination of materiality
where the jury heard testimony from various purchasers and
market experts); Alton Box Board Co. v. Goldman, Sachs &
Co., 560 F.2d 916, 922 (8th Cir. 1977) (noting the relevance
of "testimony from sophisticated institutional purchasers that
[omitted] facts would have been important to them"). In short,
we find no clear error in the district court’s conclusion that
the misstatements in this case concerned material facts.
Next, we consider whether Appellants acted with the requi-
site intent, or scienter. "[T]he term ‘scienter’ refers to a men-
dance of positive information about USEC on the market during the time
period that Appellants circulated the solicitation e-mail and special report.
According to Appellants, it was the positive media attention that USEC
was receiving that led to an increase in USEC’s share price, not securities
purchases by purchasers of the USEC Special Report. Thus, the argument
goes, the district court should not have relied on this stock price evidence
to conclude that the misrepresentations were material.
This argument misconstrues the district court’s opinion. The district
court’s materiality finding was not premised on market data; the district
court only looked to the market data surrounding USEC as an additional
way of confirming that the statements were material. Even if the district
court should not have attributed the increase in trading volume and share
price of USEC stock after May 14 to Appellants’ communications, given
the self-evident materiality of a claim that one possesses inside informa-
tion, the district court’s ultimate conclusion still would not amount to clear
tal state embracing intent to deceive, manipulate, or defraud."
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976).
The SEC meets its burden of proving scienter by establishing
that the speaker acted intentionally or recklessly; the negligent
speaker, however, avoids liability. Ottmann v. Hanger Ortho-
pedic Group, Inc., 353 F.3d 338, 343-44 (4th Cir. 2003).
Here, the district court determined that the SEC met its bur-
den of proving that Stansberry acted with the requisite intent,
and the court imputed Stansberry’s scienter to Pirate.13
In challenging the district court’s scienter determination,
Appellants contend that the First Amendment protections rec-
ognized by the Supreme Court in New York Times Co. v. Sul-
livan, 376 U.S. 254 (1964), apply to this case. They claim that
the SEC needed to prove by clear and convincing evidence
that they acted with "actual malice." To support this claim,
they direct us to Bose Corp. v. Consumers Union of United
States, Inc., 466 U.S. 485 (1984), a case involving the appli-
cation of the New York Times standard to a product disparage-
ment action.
In Bose, the Supreme Court was concerned with determin-
ing the proper standard of review for courts of appeals to
apply when confronted with a district court finding that a par-
ticular statement was made with the "actual malice" required
by New York Times. After determining that the Constitution
requires independent appellate review of "[t]he question
whether the evidence in the record in a defamation case is of
the convincing clarity required to strip the utterance of First
Amendment protection," id. at 510-11, the Bose Court moved
13Specifically, the court held that "Stansberry’s scienter is imputed to
Pirate because he effectively controlled Pirate and made the statements at
issue on behalf of Pirate as an agent of Pirate, within the scope of his
agency." (J.A. at 170.) Pirate and Stansberry do not challenge this aspect
of the district court’s decision.
on to a review of the facts of that case and noted that "the
only evidence of actual malice on which the District Court
relied was the fact that the statement was an inaccurate
description of what [the defendant] had actually perceived,"
id. at 512. The Bose Court then held that the defendant’s
statement fell within the protections afforded by the First
Amendment. Id. at 513.
Relying on the Bose Court’s statement that "there is a sig-
nificant difference between proof of actual malice and mere
proof of falsity," id. at 511, Appellants argue that we cannot
uphold the district court’s resolution of the scienter issue
because the district court "confused proof of falsity with proof
of fault." (Appellants’ Br. at 48.) They claim that there is no
evidence in the record to support the district court’s finding
of scienter, absent the falsity of the claim that an insider pro-
vided the information on which they based the tip, and
implore us to follow Bose’s lead by holding that an absence
of additional evidence of intent necessarily means that the
clear and convincing evidence standard mandated by New
York Times has not been satisfied.
As we discuss elsewhere in this opinion, see infra Part III,
we do not believe that the New York Times standard is appli-
cable to this case. Thus, we reject Appellants’ argument inso-
far as it relies on the mistaken belief that the SEC needed to
prove intent by clear and convincing evidence, rather than
under the preponderance of the evidence standard typically
applicable to civil enforcement actions under § 10(b). Simi-
larly, we reject the notion that independent appellate review
of the district court’s scienter determination is necessary
under Bose and instead review the district court’s finding that
Appellants acted with scienter for clear error. See Merchant
Capital, 483 F.3d at 766 (questions of scienter are reviewable
under the clearly erroneous rule); see also Healey v. Chelsea
Res., Ltd., 947 F.2d 611, 618 (2d Cir. 1991) ("Matters of mis-
representation, knowledge, reliance, causation, and scienter
are questions of fact, and the trial court’s findings as to those
facts may not be set aside unless they are clearly erroneous.").
After reviewing the record, we are convinced that the dis-
trict court’s conclusion that Appellants acted with scienter
was not clearly erroneous. The district court rested its conclu-
sion on the circumstances surrounding the phone call between
Stansberry and Wingfield. Having concluded that Wingfield
did not, in fact, disclose to Stansberry that approval of the
pricing agreement would be announced on May 22, the dis-
trict court simply inferred that Stansberry, having been a party
to that conversation, must have known that his claim that he
had heard from a senior USEC executive that the announce-
ment would occur on May 22 was false. The district court sur-
mised that Stansberry "could not possibly have had a belief
that the information he provided in the Super Insider Solicita-
tion and Special Report was correct in all material respects"
because he "knew full well that Wingfield had not told him
that the pricing agreement would be announced on May 22."
(J.A. at 170.)
We see nothing clearly erroneous about this conclusion.
The district court did not premise its finding on the falsity of
the statements, but on the fact that Stansberry was in a posi-
tion to know whether or not his statements were true. As other
courts have recognized, the fact that a defendant publishes
statements when in possession of facts suggesting that the
statements are false is "classic evidence of scienter." Aldridge
v. A.T. Cross Corp., 284 F.3d 72, 83 (1st Cir. 2002); see also
Fla. State Bd. of Admin. v. Green Tree Fin. Corp., 270 F.3d
645, 665 (8th Cir. 2001) ("One of the classic fact patterns giv-
ing rise to a strong inference of scienter is that defendants
published statements when they knew facts or had access to
information suggesting that their public statements were
materially inaccurate."). Stansberry, having conducted the
interview with Wingfield, would have known whether or not
Wingfield told him to "watch the stock on May 22nd." Once
the district court found that Wingfield never made such a
statement, there is nothing controversial in drawing the logi-
cal conclusion — that Stansberry would know that his claim
was false.14
In addition, it would take an act of willful blindness to
ignore the fact that Appellants profited from the false state-
ments. Appellants surely knew that absent claims of insider
knowledge, it is highly unlikely that investors would pay
$1,000 for a stock recommendation. This inference is borne
out by the emphasis that the solicitation e-mail placed on the
"inside" nature of the tip as it encouraged investors to pur-
chase the USEC Special Report. Given such a clear financial
motive for the misrepresentations, the district court’s conclu-
sion that they were made with scienter is hardly surprising.
The clear error standard of review demands something much
more egregious than what confronts us here. Parts & Elec.
Motors, Inc. v. Sterling Elec., Inc., 866 F.2d 228, 233 (7th
Cir. 1988) ("To be clearly erroneous, a decision must . . .
strike us as wrong with the force of a five-week-old, unrefrig-
erated dead fish.").
Finally, we turn to § 10(b)’s fourth requirement, the "in
connection with" requirement. Appellants claim that the fraud
in this case did not make the necessary connection to securi-
14Appellants’ only rejoinder to this point is to beat a retreat to more
First Amendment case law by directing us to defamation cases where
courts have been unwilling to find actual malice because the finding
would depend on the resolution of a dispute between a source and a writer
about what was said in a conversation. We do not find these cases rele-
vant, however, as they appear to rest their holdings on the higher burden
of proof applicable to defamation actions. The court in Long v. Arcell, 618
F.2d 1145 (5th Cir. 1980), for example, admitted that "[i]f the applicable
burden of proof had been a preponderance of the evidence, a jury verdict
either way would have to stand." Id. at 1148.
ties transactions because Appellants did not trade in USEC
stock or breach any fiduciary duties. We disagree, and for the
reasons discussed below we find no error in the district
court’s determination that Appellants committed fraud "in
connection with" the purchase or sale of securities.
"The Supreme Court has consistently embraced an expan-
sive reading of § 10(b)’s ‘in connection with’ requirement."
SEC v. Wolfson, 539 F.3d 1249, 1262 (10th Cir. 2008); see
also SEC v. Zandford, 535 U.S. 813, 819 (2002) ("In its role
enforcing the Act, the SEC has consistently adopted a broad
reading of the phrase ‘in connection with the purchase or sale
of any security.’"). We construe the statute "not technically
and restrictively, but flexibly to effectuate its remedial pur-
poses." Zandford, 535 U.S. at 819 (internal quotation marks
omitted). Under Supreme Court case law, fraudulent activity
meets the "in connection with" requirement of § 10(b) when-
ever it "touches" or "coincides" with a securities transaction.
Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547
U.S. 71, 85 (2006) ("Under our precedents, it is enough that
the fraud alleged ‘coincide’ with a securities transac-
tion—whether by the plaintiff or by someone else."); Superin-
tendent of Ins. of N.Y. v. Bankers Life & Cas. Co., 404 U.S.
6, 12-13 (1971) (holding "in connection with" requirement
satisfied where injury occurred "as a result of deceptive prac-
tices touching [a] sale of securities").
Of course, to say that a fraud is "in connection with" a
securities transaction whenever it "coincides" with that trans-
action hardly clarifies the matter. We find direction in several
factors that other courts have considered relevant when deter-
mining whether the "in connection with" requirement has
been satisfied in a particular case. These factors include, but
are not limited to: (1) whether a securities sale was necessary
to the completion of the fraudulent scheme, Zandford, 535
U.S. at 820-21; (2) whether the parties’ relationship was such
that it would necessarily involve trading in securities, Rowin-
ski v. Salomon Smith Barney Inc., 398 F.3d 294, 302-03 (3d
Cir. 2005); (3) whether the defendant intended to induce a
securities transaction, United Int’l Holdings, Inc. v. Wharf
(Holdings) Ltd., 210 F.3d 1207, 1221 (10th Cir. 2000), aff’d,
532 U.S. 588 (2001); and (4) whether material misrepresenta-
tions were "disseminated to the public in a medium upon
which a reasonable investor would rely," Semerenko v. Cen-
dant Corp., 223 F.3d 165, 176 (3d Cir. 2000). Importantly,
these factors are not mandatory requirements that a fraud
must satisfy in order to meet § 10(b)’s "in connection with"
requirement. They exist merely to guide the inquiry, and we
do not presume to exclude other factors that could help distin-
guish between fraud in the securities industry and common
law fraud that happens to involve securities. See Zandford,
535 U.S at 820; see also Stoneridge Inv. Partners, 128 S. Ct.
at 771 ("Though § 10(b) is not limited to preserving the integ-
rity of the securities markets, it does not reach all commercial
transactions that are fraudulent and affect the price of a secur-
ity in some attenuated way." (internal citations and quotation
marks omitted)). Moreover, a fraud need not satisfy all of the
factors to be "in connection with" a securities transaction; a
close fit with one factor may well be enough for a fraud to
result in § 10(b) liability. The application of the factors should
be rooted in the understanding that the "in connection with"
requirement is a flexible one and that questions concerning its
scope are best examined on a case-by-case basis. See
Semerenko, 223 F.3d at 175 (noting that "the scope of the ‘in
connection with’ requirement must be determined on a
case-by-case basis"); Chem. Bank v. Arthur Andersen & Co.,
726 F.2d 930, 942 (2d Cir. 1984) ("In cases near the border-
line, courts have warned that ‘[i]t is important that the stan-
dard be fleshed out by a cautious case-by-case approach.’"
(quoting Smallwood v. Pearl Brewing Co., 489 F.2d 579, 595
(5th Cir. 1974))).
We first consider whether a securities transaction was nec-
essary to the completion of the fraudulent scheme. In Zand-
ford, for example, the Supreme Court noted that the stock
sales in that case were a fundamental component of the defen-
dant’s fraudulent scheme:
[E]ach sale was made to further respondent’s fraudu-
lent scheme; each was deceptive because it was nei-
ther authorized by, nor disclosed to, the Woods.
With regard to the sales of shares in the Woods’
mutual fund, respondent initiated these transactions
by writing a check to himself from that account,
knowing that redeeming the check would require the
sale of securities.
Zandford, 535 U.S. at 820-21. See also Alley v. Miramon, 614
F.2d 1372, 1378 n.11 (5th Cir. 1980) ("[T]he ‘in connection
with’ test . . . is satisfied when the proscribed conduct and the
sale are part of the same fraudulent scheme."); In re Franklin
Mut. Funds Fee Litig., 388 F. Supp. 2d 451, 472 (D.N.J.
2005) ("[T]he only way for this scheme to succeed was for
investors to purchase securities (shares of the defendant
mutual funds).").
Appellants argue that the fraud in this case was complete
when investors purchased the USEC Special Report because
the $1,000 purchase price was the only material benefit that
Appellants received. Under this theory of the case, Appellants
derived no benefit from the purchasers’ securities trading.
They claim:
[T]he alleged fraud was consummated and con-
cluded when the Report was sold and the reader paid
$1000. If there was a fraudulent scheme, no subse-
quent securities transactions were necessary to it, as
neither the Publisher nor the Author derived any
benefit from such trading. Indeed, the defendants
would have committed fraud if not a single pur-
chaser of the Report bought USEC shares, or if the
Report named a fictitious company with a fictitious
ticker symbol, because they still would have
‘defrauded’ readers of the cost of the publication.
(Reply Br. at 9.) We believe that this is a rather short-sighted
view of the fraudulent scheme and, taking the facts in the light
most favorable to the SEC, we conclude that Appellants did
benefit from securities trading by purchasers of the USEC
Special Report.
First, Appellants’ characterization of the fraud fails to rec-
ognize that Appellants used stock purchases by early purchas-
ers of the USEC Special Report as a way of enhancing the
credibility of the report. Over 800,000 investors received the
Super Insider Tip E-mail that offered the USEC Special
Report for sale, but they did not receive the solicitation at the
same time. Rather, Appellants sent out the solicitation in
waves to various groups of investors. And, later versions of
the solicitation pointed to a rise in USEC’s stock price —
which the district court determined was the result of pur-
chases by early recipients of the solicitation and special report
— as supporting the trustworthiness of the tip.
When Stansberry first circulated the solicitation to the
Pirate Investor Blast Database, on May 13, the solicitation
noted that the stock was "only a $7.00 stock." (J.A. at 2979.)
On May 17, however, Stansberry edited the solicitation e-mail
to reflect a change in the stock’s price. Future versions of the
e-mail reflected the stock’s updated price of $9.00 a share.
Moreover, and most importantly, future versions of the solici-
tation e-mail used this jump in price as a selling point. The
e-mail pointed out that the stock in question "has jumped this
week and looks poised to go much higher," and quickly fol-
lowed with an offer to sell the identity of the company for
$1,000. (J.A. at 3034.) Thus, the rising stock was important
to the success of the scheme because it served to motivate
later purchasers to part with their requisite $1,000 payment.
The fraud was not complete when investors paid $1,000 to
learn the identity of the company in question; Appellants also
needed those investors to purchase the stock thereby increas-
ing the stock price so as to boost the credibility of the solicita-
tion e-mail to obtain more $1,000 payments.
These facts are similar to those that the Third Circuit faced
in Rowinski. In that case, Salomon Smith Barney, a stock bro-
kerage and investment firm, allegedly provided "research
[that] was unlawfully biased in favor of the firm’s investment
banking clients, to the detriment of its retail brokerage cus-
tomers." Rowinski, 398 F.3d at 296. Specifically, the plaintiffs
alleged that Salomon Smith Barney systematically misrepre-
sented the value of securities to investors who used the firm’s
retail brokerage services in order to "curry favor with invest-
ment banking clients and reap hundreds of millions of dollars
in investment banking fees." Id. at 296-97. Seeking to avoid
the provisions of the Securities Litigation Uniform Standards
Act of 1998 ("SLUSA"), which provides for the removal and
federal preemption of certain state court class actions alleging
"a misrepresentation or omission of a material fact in connec-
tion with the purchase or sale of a covered security," 15
U.S.C.A. § 78bb(f)(1)(A) (West 2009), the plaintiffs argued
that the fraud in that case did not occur "in connection with
the purchase or sale of a covered security."15
Much like Appellants’ argument that the conduct in this
case sounds in common law fraud, the plaintiffs in Rowinski
argued that their complaint stated a "straightforward breach of
contract claim, i.e., Salomon Smith Barney agreed to provide
15While in Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294 (3d
Cir. 2005), the Third Circuit was considering the "in connection with"
requirement in the context of the Securities Litigation Uniform Standards
Act of 1998 ("SLUSA"), its interpretation was tied to existing doctrine
under § 10(b). Rowinski, 398 F.3d at 299; see also Instituto de Prevision
Militar v. Merrill Lynch, 546 F.3d 1340, 1348 (11th Cir. 2008) ("‘[I]n con-
nection with the purchase or sale’ of a security under SLUSA covers the
same range of activities that the SEC could prosecute as violations of
§ 10(b) and Rule 10b-5."); Siepel v. Bank of Am., N.A., 526 F.3d 1122,
1127 (8th Cir. 2008) (same).
unbiased investment research and failed to provide it." Rowin-
ski, 398 F.3d at 300. The Third Circuit disagreed, observing:
For this purported scheme to work, investors must
purchase the misrepresented securities. Absent pur-
chases by "duped" investors and a corresponding
inflation in the share price, Salomon Smith Barney’s
biased analysis would fail to benefit its banking cli-
ents and, in turn, would fail to yield hundreds of mil-
lions of dollars in investment banking fees. The
scheme, in other words, necessarily "coincides" with
the purchase or sale of securities.
Rowinski, 398 F.3d at 302. In other words, the alleged fraud
was not confined to the firm’s representations to individual
investors — the court realized that the stock purchases of
investors who acted on that advice would lead to third parties,
the companies, providing a benefit to the firm. Likewise, in
this case Appellants used the inflation in the stock price
caused by investors who purchased USEC stock in reliance on
early versions of the USEC Special Report to influence third
parties — investors who received the updated versions of the
solicitation — to purchase copies of the USEC Special
Report. Thus, securities transactions helped Appellants to
maximize the profitability of their scheme.
In addition, the record shows that Appellants were not only
relying on the rise in USEC’s stock price to boost the credibil-
ity 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 reputa-
tion that would accrue with those who purchased stock in reli-
ance 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." (J.A. at 3143) (emphasis added). In
effect, Appellants’ own definition of success depended on

people purchasing securities in reliance on the report.

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