## Facts

- Pirate Investor LLC published investment newsletters and marketed products through mass email campaigns; Frank Porter Stansberry served as editor-in-chief.
- In 2002, Pirate and Stansberry promoted and sold a $1,000 email “stock tip” concerning USEC, Inc.; purchasers received a more detailed report after payment.
- The promotional email and paid report represented that the information was based on conversations with a “senior executive inside” USEC and that the insider disclosed an imminent announcement on a specific date that would drive the stock price up.
- The district court found the “senior executive” sourcing representations were false; the asserted insider did not provide the information as described.
- More than 1,000 customers bought the tip, generating over $1 million in net proceeds for Pirate.
- USEC later announced an agreement, but not on the promoted date and not in a manner matching the “inside information” narrative.
- The SEC filed a civil enforcement action under Exchange Act § 10(b) and Rule 10b-5; after a bench trial, the district court found Pirate and Stansberry liable and ordered disgorgement, civil penalties, and an injunction against future violations.
- Pirate and Stansberry appealed, challenging liability (including the “in connection with” element) and arguing the injunction was overbroad.

## Issues

1. Whether knowingly false statements about an insider source used to sell a paid stock tip satisfy § 10(b) and Rule 10b-5, including the requirement that the fraud be “in connection with” the purchase or sale of a security, even when defendants did not trade the referenced stock.
2. Whether an injunction barring future violations of § 10(b) and Rule 10b-5 was impermissibly overbroad.

## Decision

- The Fourth Circuit affirmed the judgment in full.
- The court held Pirate and Stansberry committed securities fraud by making material misrepresentations about the source of information in connection with the offer and sale of the stock tip.
- The court concluded the “in connection with” requirement was met because the misrepresentations were intended to induce securities trading tied to a specific issuer, even though the defendants’ immediate transaction was the sale of information.
- The court rejected First Amendment-based objections because the case concerned fraudulent statements of fact made in commercial solicitation, not protected opinion or editorial commentary.
- The court affirmed the disgorgement, civil penalties, and the injunction, finding no abuse of discretion and concluding the injunction was justified by the misconduct and risk of recurrence.

## Legal Principles

- A violation of § 10(b)/Rule 10b-5 in an SEC enforcement action requires (among other elements) a material misrepresentation or omission, scienter, and conduct “in connection with” the purchase or sale of a security using interstate commerce or the mails.
- False statements about an information source (e.g., claiming insider access) can be material when a reasonable recipient would view the purported source as important in deciding whether to purchase the tip and trade securities.
- The “in connection with” element is satisfied where deception is integral to a scheme designed to prompt securities transactions, even if the defendant does not personally buy or sell the securities.
- The First Amendment does not protect fraudulent commercial speech; enforcement targeting knowing false statements of fact in marketing investment advice does not immunize defendants as “press” or “publishers.”
- Disgorgement, civil penalties, and broad prophylactic injunctions are permissible equitable remedies where intentional securities fraud is shown and future violations are reasonably feared.

## Conclusion

The Fourth Circuit upheld SEC enforcement against a newsletter publisher and its editor for selling paid stock tips premised on knowingly false claims of insider sourcing, holding the scheme fell within § 10(b) and Rule 10b-5 despite the absence of issuer-stock trading by defendants, and affirming disgorgement, penalties, and an injunction against future violations.


SEC v. Pirate Inv. LLC, 580 F.3d 233 (4th Cir. 2009)