THE CASE of the U.S. Securities and Exchange Commission vs. Pirate Investor LLC illuminates many important things, including a government attack on free speech, why frisky investors buy dumb stocks and how come a Maryland boy owns a French chateau.
It also shows why your e-mail in-box is crammed with garbage from people you don't know who don't sign their real names: Spam pays.
Last year Agora Inc., a Baltimore newsletter company, bombarded thousands with a dubious and shameless e-mail come-on for stock market riches.
"DOUBLE YOUR MONEY ON MAY 22 WITH THIS 'SUPER INSIDER' TIP," screamed the spam, sent by somebody calling himself Jay McDaniel. "This could be the simplest, safest and easiest way you'll ever double or even triple your money. Ever."
For $1,000, the hypemaster would furnish his report, "the best tip I've ever come across," describing a deal "that will create more than $2.5 billion in profits for one small U.S. company" and identifying the stock that would soar as a result.
Those of you who can tie your shoes will not be surprised to learn that $2.5 billion in profits never materialized, the stock did not double and the guy who peddled the tip was not named Jay McDaniel.
You should be amazed, however, that 1,200 people bought the report, according to the SEC. That's $1.2 million for a four-page report and a seven-page spam pitch that probably took one person a few days to produce. (Two hundred eventually requested and got their money back.)
The SEC went after Agora, affiliate Pirate Investor and F. Porter Stansberry, the Agora analyst whose nom de spam was Jay McDaniel.
The case involves United States Enrichment Corp., or USEC, which converted Russian nuclear warheads into commercial fuel and hoped a May 2002 meeting of President Bush with Russian President Vladimir V. Putin would lead to lower prices for Russian uranium. The government claims Agora defrauded investors by publishing "false information," including the assertion by Stansberry that "a USEC senior executive has assured me that the new Russian agreement will be approved just prior to the upcoming Bush-Putin summit."
The USEC executive turned out not to be so senior; he ran investor relations. And he told SEC investigators that he never said the Russian deal would happen in time for the summit.
Porter Stansberry, 30, is blond and handsome and wore a light- blue oxford shirt when I met him in Agora's walnut-paneled Mount Vernon offices. He has a University of Florida political science degree, and he writes the monthly Porter Stansberry's Investment Advisory (annual price, $79 to $499 depending on which ad you respond to) and works on several other Agora letters. He cheerfully said, "Thank you," when I suggested that promotions for his research were "beyond hype."
Hype is the Agora ethos.
"In the world of newsletter publishing, you have to shout to be heard," says Bruce W. Sanford, an Agora lawyer. "You have to obviously read it carefully, because this is the world of investment newsletter promotions," he added, noting that Agora reimburses subscribers who don't like the advice.
Agora booked revenue of $100 million last year publishing dozens of letters with a total circulation of about 700,000, said Matthew J. Turner, the company's in-house lawyer.
"Agora's franchise is the melodramatic and bizarre," Worth magazine said in a 1996 article. The franchise paid for the French castle of founder Bill Bonner, son of a Maryland tobacco farmer.
The SEC case raises the question of whether Agora sailed beyond bizarre to falsehood and whether that's something the agency should worry about. Agora lawyer Sanford denies Stansberry lied and says the use of "Jay McDaniel" was to distinguish the one-time USEC report from Stansberry's regular letter.
There was no breakthrough summit agreement on uranium, although USEC at some point seems to have completed the deal Stansberry was writing about. USEC stock popped from $7 to $10 on pre-summit hype, plunged back to $7 almost immediately, went back to $9 and now sells for around $7.
The case has dangerous constitutional overtones, Sanford warns, because, unlike defendants in previous newsletter cases, Stansberry did not run a "pump and dump" operation in which he traded touted stock. If the SEC can go after Stansberry for expressing an opinion on stock, Sanford said, it can go after writers for The New York Times or anybody else.
"I don't think the First Amendment covers knowingly false statements," counters SEC lawyer Ken Israel, noting bans on false advertising.
But the Federal Trade Commission handles ads, not the SEC, which should leave Agora alone. If the case makes stock letters tone down the malarkey, however, that's not a bad thing.