Seeing red

Lawsuits involving financial newsletters could erodeFirst Amendment rights.

From the Summer 2005 issue of The News Media & The Law, page 31.

By Amanda Groover

Like the typical reporter, Tim Mulligan interviews sources and combs public records before writing stories. But when he received a subpoena for some of his records, a Maryland court rejected his motion to quash.

Mulligan, who publishes a financial newsletter, The Eyeshade Report, suspects that the motion was denied because he was subpoenaed for his subscriber list instead of his sources.

In an unrelated but similar case, Agora Inc., a Baltimore financial newsletter publisher, finds itself defending a Securities and Exchange Commission fraud rule never used against a disinterested publisher. The rule could hold publishers to a standard of truth higher than actual malice when they report about securities.

Despite reporting on issues of public importance such as stocks, commodities and the economy, financial newsletters may be easy targets for lawsuits chipping away at First Amendment rights. Not only is the financial newsletter industry worried, but mainstream financial news publishers fear the effects also.

Whose privilege?

Mulligan said he has no doubt that what he does is investigative reporting and that his work product is news. So when he was subpoenaed in 2003 for his subscriber list in a lawsuit in which he was not a party, he asserted the reporters privilege under Maryland’s shield law. Maryland Circuit Court Judge Eric M. Johnson offered no explanation for his refusal to quash the subpoena, leading Mulligan to think that Johnson either did not believe he fit the definition of a reporter or did not think subscriber lists should be protected from compelled disclosure.

In previous cases involving financial newsletter publishers asserting reporters privilege, courts have found that newsletter reporters should qualify for the privilege as long as they are not involved in the transactions they investigate and report. (See sidebar, page 32.) Mulligan was not personally involved in the any of the transactions reported in his stories, so he is most concerned that his motion to quash might have been denied because the judge did not think his subscriber list should be protected.

The First Amendment has, in many cases, protected the right to anonymously speak and receive information. In 1960, the U.S. Supreme Court ruled in Talley v. California that the government cannot require leafleteers to identify themselves. In 1999, the high court ruled in Buckley v. American Constitutional Law Foundation that petition signature collectors cannot be required to wear name badges. In 2002’s Watchtower Bible & Tract Society of New York v. Village of Stratton, the Supreme Court ruled that it is unconstitutional to require permits for door-to-door canvassers.

Those cases establish that requiring publishers to release subscriber lists would infringe the First Amendment rights of otherwise anonymous subscribers, according to a friend-of-the-court brief filed in Mulligan’s appeal by Public Citizen and joined by a coalition of groups, including The Reporters Committee for Freedom of the Press and the Electronic Frontier Foundation.

The brief argues that readers may stop subscribing to certain publications if they know their identities can be made available to the government or other interested parties, especially in cases where the material is socially unpopular.

Compelled disclosure of subscriber lists can create other problems for publishers. Agora was subpoenaed for its subscriber list in 2004 during litigation with the SEC in federal court in Maryland. (Although Agora and Mulligan’s cases arose in Maryland, they are unrelated.) Although the court ultimately accepted Agora’s First Amendment argument to keep the records confidential, Agora’s attorney, Bruce Brown, said he is concerned these types of subpoenas could hurt publishers, especially those who cull database information on the reading habits of their subscribers and Web site visitors.

“I would think those larger publishers have to be concerned about the sanctity of their databases if we enter into an era when subscriber information is deemed to be fair game. . . . And, as publishers start to gather more information [from subscribers], it provides a trove of information for litigators or regulators who might be interested in the information.”

Mulligan says compelled disclosure of subscriber lists creates special problems for industry-specific reporters because their subscribers and news sources often are the same people.

“Even if a subscriber did not cancel their subscription after their identity was revealed, it is a reasonable possibility that he or she would stop being a source in the future, thereby potentially harming the quality of my product,” he said. “Further, if a subscriber were a source . . . revelation of the subscribers might lead to my sources.”

Although Brown succeeded in keeping Agora’s subscriber list from the SEC, he is concerned that such subpoenas might become more common.

“We’re used to seeing privilege cases where we’re fighting over newsgathering materials and confidential sources, but publishers are obviously major business enterprises and they have all kinds of other information that could be subject to subpoena,” he said. “Some people would say a subscriber list is something that is not protected in the same way as a confidential source, and that can create problems.”

Mulligan said that financial newsletters are more of a target for subscriber list subpoenas because other parties think smaller publishers will not resist as much as daily newspapers.

“The information I have is definitely available elsewhere, especially from larger news outlets, and they know that. But I’m the easiest person to go after,” said Mulligan, who represented himself in court. “I’d probably be bankrupt right now if I’d had to hire counsel to help me with this. I make an easy target.”

Using securities laws to sue publishers

The legal challenge facing Agora could affect every news publisher that reports on securities.

Agora’s writers investigate companies for financial news reports sent to subscribers, who use the information to decide stock trades. In 2002, Agora Publisher Frank Porter Stansberry published and sold an investigative report predicting a dramatic rise in the stock price of a publicly traded energy company. The report cited a particular date when international agreements would lower the price of uranium, making the company more profitable.

Although the report was otherwise accurate, the date was incorrect. Stansberry said he discussed the date with the energy company’s investor relations director, who later claimed he never told Stansberry the date.

The Securities and Exchange Commission sued Agora and Stansberry under Rule 10b-5, a provision in the law typically used to prosecute securities fraud. The SEC has used the rule to prosecute publishers who used their reports to manipulate the market to their advantage, but this is the first case where an uninvolved publisher has been prosecuted under securities laws for a factual misstatement.

Brown, Agora’s attorney, said publishers should be particularly concerned about this case because the SEC rule typically does not require a showing of actual malice. If the court applies traditional SEC standards to this case, the publisher would be held to much higher standard than required under defamation claims.

Under Rule 10b-5, the SEC has to provide only a “preponderance of evidence” that the publisher disregarded the truth of the statement. Defamation plaintiffs, on the other hand, must prove with “clear and convincing” evidence that the publisher recklessly disregarded the truth.

Although a seemingly minor difference, the practical effect is tremendous, Brown said.

“In this case, all we’ve got is a phone call between two guys to go on,” he said. “It’s pretty hard to say that using the information from the investor director constitutes actual malice under typical publishing standards. But if we look at what constitutes recklessness under securities law cases under the preponderance standard, it could be easier to say that the defendant was reckless.”

Bad precedent in the case could affect the entire financial news industry, Brown said.

“If the court takes this case the wrong way, you don’t want to be an editor sitting there at 5 o’clock and trying to be absolutely sure that you can verify that any statement relating to a publicly traded company is true,” he said.

Bloomberg News is concerned enough about the possible effects of Agora’s case that it wrote a letter to the judge in Agora’s case.

“Writing about stocks and bonds [is] almost always in the public interest. We’re writing that somebody is cheating; we’re writing that somebody is scamming the public, that somebody is hurting the public interest,” said Charles Glasser, counsel for Bloomberg News. “This is important information that publishers need to get out there.”

Over-extending the SEC rule would chill this important kind of speech, Glasser added.

“We don’t want a situation where a disinterested publisher who makes an honest mistake is held liable, and then is scared to publish this kind of information,” he said.

SEC intrusion into publishing comes dangerously close to regulating speech, said William Nissen, an attorney for Vermont financial newsletter Publisher Terry Allen. An SEC lawsuit filed in July alleges Allen published misleading information about stock performance projections in his newsletter, Terry’s Tips. Unlike Agora, which is being sued as a publisher, Terry’s Tips is being sued as an “investment adviser,” an SEC designation that would make it more susceptible to regulation.

The U.S. Supreme Court has held that financial newsletter publishers are not “investment advisers” under SEC rules in the 1985 case, Lowe v. SEC. The court ruled that someone who provides impersonal trading recommendations cannot be regulated as an investment adviser. Nissen said the biggest difference between Allen’s case and the 1985 case is the use of the Internet rather than paper newsletters to convey the stock information.

Furthermore, a Commodities Futures Trading Commission regulation of such speech was ruled unconstitutional in Taucher v. Born, a 1999 case in federal court in Washington, D.C.

“The Taucher court held that persons who sell publications and software such as these are selling ideas for trading, and not trading itself,” Nissen said. “By seeking to regulate publishers such as Terry’s Tips as investment advisers, and by treating them as if they’re selling securities rather than ideas, the SEC is acting contrary to the First Amendment principles which were at issue in the Lowe and Taucher cases.”

Nissen cautioned the larger news community to closely watch the Terry’s Tips case.

“The danger to publishers is that if the SEC were successful, engaging in publishing of trading recommendations would become a regulated activity subject to government licensing requirements and control of content, instead of the free speech which it should be,” he said.