A Baltimore investment research firm and one of its editors have been ordered to pay $1.5 million in restitution and civil penalties for disseminating false stock information and defrauding public investors through a financial newsletter, according to a court ruling.
The decision by Baltimore U.S. District Judge Marvin J. Garbis, ends four years of litigation between the Securities and Exchange Commission and defendants Pirate Investor LLC and Frank Porter Stansberry.
The suit focused on a "Special Report" Stansberry wrote - and Pirate published - along with e-mail advertising the document. They claimed investors could double their money if they paid $1,000 for a stock tip involving Bethesda energy company USEC Inc. In total, 1,217 people purchased the report, although 215 of them got their money back after complaining.
"Stansberry's conduct undoubtedly involved deliberate fraud, making statements [about a stock] that he knew to be false; Pirate acted in reckless disregard for regulations when it published Stansberry's unbelievable claims without a shred of confirmation," Garbis wrote in a 49-page ruling issued last week.
"The violation plainly involved the risk of substantial loss to those who bought the Special Report and relied upon Stansberry's false statements in their stock purchase decisions."
Bruce D. Brown, the Washington attorney who represented the defendants, said Stansberry and Pirate Investor - which is now known as Stansberry & Associates - will likely appeal the decision. Both maintain they did nothing wrong.
"To this day, they continue to stand by their reporting on the company and their view of the stock at the time," Brown said yesterday. The defendants believed their stock claims based on Stansberry's information, Brown said.
The court found that Pirate's parent company, Agora Inc., which had been named in the suit, was not responsible for the newsletters.
"The parent company had nothing to do with the publication at issue," Brown said. "Agora is delighted to be out of the case."
According to the ruling, Stansberry sent a mass e-mail in 2002 offering to sell the Special Report, which claimed to have inside information about USEC dealings. The solicitation said investors could double their money if they bought and sold when told.
The information turned out to be wrong, and in April 2003, the SEC filed a lawsuit charging the defendants with securities fraud.
According to last week's ruling, Pirate must pay $801,600 in restitution, along with interest of $248,496, while Stansberry has to pay $200,400 in restitution and $62,124 in interest. Each party has also been assessed a penalty payment of $120,000.
According to the Stansberry & Associates Web site, Stansberry describes himself as the founder of the eight-year-old company. He writes a monthly newsletter, Porter Stansberry's Investment Advisory, that "deals with safe value investments poised to give subscribers years of exceptional returns."
The site says the Mount Vernon-based company has subscribers in more than 100 countries and more than two dozen research analysts and assistants.
"Unlike Wall Street investment banks and brokerages, we are completely independent. We only publish investment research. We do not solicit banking business. We do not provide brokerage services or manage money," the site states. "We believe that's how the investment business should be, no hidden interests or secret agendas. We simply publish our best investment ideas. And our customers only stay with us if these ideas work."
Stansberry could not be reached for comment last night, nor could the SEC.