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WASHINGTON — In a controversial lawsuit that some see as an incursion on First Amendment protections and a broad step over regulatory boundaries, the Securities and Exchange Commission is suing a Baltimore publishing company for fraud. Judge Marvin Garbis of the U.S. District Court for the District of Maryland will hear arguments today to dismiss the case against Agora Inc., a publisher of investor newsletters. The SEC claims Agora committed securities fraud when it sent an e-mail last spring promising customers they could reap a big return with the help of a “super insider tip.” It came in a four-page report that recommended when to buy and sell stocks in a Maryland company — a report based, it turned out, on false information and speculation about the company. The cost to readers: $1,000. In the past, the government has successfully pursued publishers for misusing insider information in violation of securities laws. But this is one of the first securities cases over comments about a company the defendant didn’t receive compensation from or in which it had no stock ownership. Agora’s lawyers say the charges are without merit and fall outside the commission’s reach. “We find the SEC’s complaint to be nothing short of outrageous and irresponsible,” says Agora’s lawyer Bruce Sanford, a D.C. partner at Baker & Hostetler. “The SEC has plenty of other enforcement problems. Why it would waste time going after newsletter publishers is perplexing.” The issue has attracted the interest of financial news company Bloomberg News, which is concerned the case could set a bad precedent. “When the SEC tries to extend its jurisdiction into publications, we thought there were serious First Amendment concerns that should be put before the judge,” says Bloomberg media counsel Charles Glasser. But Kenneth Israel Jr., the district administrator of the SEC’s Salt Lake City office, which brought the suit, says the case should not alarm mainstream business news publishers. (It is not uncommon for SEC field offices to bring suits outside of their geographic area.) Agora’s actions fall under general anti-fraud provisions of securities laws, Israel says. The SEC isn’t out to license or regulate the newsletter industry, but simply to bring appropriate securities laws to bear on newsletters’ activities. “It’s a fairly unusual fact situation,” he says. “I can’t see a company like Bloomberg doing something like this.” The SEC suit also names Agora’s subsidiary, Pirate Investor LLC, and Frank Porter Stansberry, an editor at the company. In its complaint, the SEC alleges that Agora “engaged in an ongoing scheme to defraud public investors by disseminating false information in several Internet newsletters. The defendants offered to sell the inside information to newsletter subscribers. � The purported inside information was false and, as a result, the subscribers did not realize the profits the defendants promised.” Agora, however, profited handsomely, raking in an estimated $1 million from the e-mail offer, according to the SEC. The commission is seeking an order forcing Agora to disgorge the profits and an order barring the company from sending out such solicitations in the future. Under securities laws, the commission could also seek up to $125,000 per incident in civil fines, but has not decided on an amount, says the SEC’s Israel. DOUBLE TROUBLE Agora, started in 1979, puts out a number of newsletters offering investment advice. According to its court papers, Agora publishes “blunt, aggressive, even controversial commentary and predictions” about companies. The e-mail at issue enticed investors to buy Agora’s report on a company called USEC Inc., a Bethesda-based vendor of enriched uranium. “Make no mistake, my plan to double your money is extremely low risk. � Focus on doubling your investment dollar SAFELY on the back of an insider tip,” it read. The SEC says the e-mail amounted to a fraudulent claim about USEC’s stock. That differentiates the suit from the others the SEC has brought against journalists and publications. Typically, such cases have involved allegations that the defendants accumulated thinly traded stocks, hyped them and then sold their shares at a profit — a practice known in industry parlance as “pump and dump.” While unusual, the case against Agora is not the first time the SEC has gone after an investment newsletter publisher. In 1985, the Supreme Court ruled in favor of an investment newsletter publisher in Lowe v. Securities and Exchange Commission, finding that the defendant’s newsletter was not an “investment adviser” under the Investment Adviser Act of 1940 and thus didn’t have a duty to the SEC. In an opinion written by Justice John Paul Stevens, the court ruled that the SEC didn’t have the right to stop the Lowe Management Corp. from publishing an investment advice newsletter. “Congress, plainly sensitive to First Amendment concerns, wanted to make clear that it did not seek to regulate the press through the licensing of nonpersonalized publishing activities,” Stevens wrote. The 1940 act provides exclusions for what it describes as “general and regular circulation” publications and “disinterested publishers,” which includes those who don’t have a financial interest in a security that is the subject of a news report or editorial column. To get around those exclusions, the SEC in the Maryland case filed its suit under a different provision of federal securities law that has no exemptions for disinterested publishers. The SEC argues that exclusions for “disinterested publishers” would only apply if the charges were filed under the 1940 act, and further says that Agora wouldn’t be eligible for the exclusion because it does not have a general circulation or provide disinterested commentary and analysis. But in court papers, Sanford asserts that the First Amendment trumps the company’s liability in the case, writing: “The financial press and investment newsletter industry enjoy the full privileges of the First Amendment. In charging into the realm of protected speech, the SEC is operating outside of the boundaries of its statutory, constitutional and jurisprudential framework.” PROTECTING SPEECH At the heart of the SEC’s allegation against Agora is the question of who can be held responsible under the commission’s anti-fraud provisions, says O’Melveny & Myers securities lawyer Bruce Hiler. “This is an issue of a party that traditionally doesn’t have the duties that are requisite for securities laws violations,” says Hiler. Business news publishers and broadcasters could have reason to be anxious about the SEC’s latest move, adds Hiler. “The next case might be one where there isn’t clearly fraudulent intent,” Hiler says. The worry is that the SEC could require financial media outlets that report inaccurate commentary or predictions about stocks to prove they had a reasonable basis for publishing or broadcasting the information — or face fraud charges under securities laws. That would be the same litmus test required of public companies and stock analysts that are subject to securities laws and regulated by the commission. “That is a dangerous incursion into First Amendment rights,” says Hiler. The SEC argues that Agora isn’t protected from the commission’s action by the First Amendment, claiming that “fraud is not protected speech.” “Agora’s newsletters claim to be ‘a service featuring independent, original and thoughtful research into the process of wealth-creation,’” the SEC wrote in court papers. “Instead, the newsletters contain nothing more than baseless speculation and outright lies, fabricated to induce investors to pay Agora for subscriptions or purported inside information.” Bloomberg’s Glasser says his company has a stake in stopping the SEC in its tracks. In an Oct. 31 letter to Judge Garbis, Bloomberg took care to note that its interest in the case was based on First Amendment issues and was not intended as a show of support for Agora. “Our position is completely independent of the fact of whether Agora is a good publisher or bad publisher or a publisher at all,” Glasser says. The fear, he continues, is that if the SEC does win, it won’t only mean a blow to Agora but will open the door to potential suits against a broad spectrum of publishers and broadcasters of financial news. “The judge might write a legal opinion that allows any shareholder of any stock to sue any publication for a good-faith error,” says Glasser. But the debate over whether Agora and other publishers are even accountable to the SEC remains open. “Is there a duty by these particular folks to tell the truth?” asks Hiler. “That’s easy to answer for corporate officers and directors and on the other end of the spectrum, for someone standing on a soap box in the middle of Lafayette Square. But when does someone making a misrepresentation to the public have a duty to speak the truth under SEC laws?” Lily Henning is a reporter with Legal Times , a Recorder affiliate based in Washington, D.C.

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