The Court of Appeals for the Fourth Circuit affirmed the District Court of Maryland’s decision in favor of the Securities and Exchange Commission in a civil enforcement action for securities fraud under Section 10(b) of the Securities Exchange Act of 1934, against an investment newsletter publisher, publisher’s editor in chief and publisher’s parent company (defendants). The action arose out of a “Super Insider Tip Email” (Email) circulated by the defendants in which the defendants promised to provide inside information to potential investors, purportedly learned from an executive of a uranium-enrichment services provider (Company), in exchange for $1,000.

The Email stated that upon the payment of the aforementioned fee, the defendants would inform an investor of the specific date on which a major international agreement between the United States and Russia, which was anticipated to lead to substantial profits for the Company, would be concluded. It was anticipated that the Company’s stock price would rise when the agreement was consummated and that any investor with knowledge of that date would be able to secure significant profits. However, unbeknownst to the investors who paid the fee, the defendants did not possess the inside information concerning the international agreement that they claimed to have and, in fact, the agreement was not consummated when they predicted.

On appeal, defendants argued, among other things, that the First Amendment to the U.S. Constitution required that their statements recommending the Company’s stock be scrutinized under the heightened protections afforded to statements by the media as recognized by the Supreme Court in New York Times v. Sullivan. If this stricter standard were to apply, the SEC would have been required to prove by “clear and convincing evidence” that the defendants’ false statements were made with actual malice. In rejecting the defendants’ argument, the Fourth Circuit found that while the government could not label certain speech as fraudulent in order to restrict free speech, the First Amendment does not shield statements that are actually fraudulent, such as those made by defendants. (SEC v. Pirate Investor LLC, No. 08-1037, 2009 WL 2949091 (4th Cir. Sept. 15, 2009))