SEC, Cure Thyself

Viewed from the still-smoldering wreckage of the financial meltdown, the Securities and Exchange Commission (SEC) sure seems like a failed watchdog. As the system neared collapse, the SEC actually relaxed capital standards for some of the biggest players in the so-called “shadow banking” business of arcane investment and debt vehicles, to the point that Bear Stearns, for one, was carrying 33 times more debt than capital before it imploded.
 
For years the SEC missed the massive Ponzi scheme of Bernard Madoff, as well as the many mini-Madoffs who emerged in his wake. And all the while, it turns out, some of its senior regulatory officers were spending working hours gazing at pornography.
 
Yet during this time and continuing right now, the SEC has been dogged in its pursuit of one target — a journalist.
 
We wrote about the case of Porter Stansberry and his eponymous newsletter in this space back in December of 2008, coincidentally the month Bernie Madoff’s scam was uncovered.
 
As we noted then, Porter Stansberry’s Investment Advisory is a little out of the mainstream of the business press, trafficking in breathless tips and speculation aimed at making money for the investors who shell out serious cash to subscribe. In 2003, Stansberry published an item reporting he’d been told by an executive of a certain company that it was about to land a big contract. In Stansberry’s retelling, the executive was specific about the date, so he told subscribers there was a 48-hour window in which to make a windfall. The executive says he didn’t specify a date for the deal, which did indeed occur, but a little while after Stansberry’s item said it would. Any subscriber who acted on the newsletter’s timing got no windfall.
 
Astonishingly, the SEC called that securities fraud, arguing that the theoretical short-term losses that might have occurred were evidence of his “crime.” The SEC never alleged Stansberry was published this information so he could profit on the stock himself. He was acting just like any journalist in the business press, reporting and commenting as faithfully as he could.
 
That why mainstream newspaper publishers and journalist organizations such as the Reporters Committee for Freedom of the Press leapt to Stansberry’s side as the case made its way through the courts. They understood that this case wasn’t about Porter Stansberry or his investment advice. It was, as E&P put it two years ago, “about whether newspapers and all the press, including bloggers, can cover Wall Street without being under the regulatory thumb of the SEC, forever under the threat that the agency — or some disgruntled shareholder — will bring down the fury of securities law for something they wrote about stocks.”
 
That day, unfortunately, is here. In the last days of its term, the U.S. Supreme Court without comment refused to review a federal appellate court decision holding Stansberry liable for what he wrote about the big contract that got delayed.
 
The SEC’s regulatory overreach must not stand. Congress must quickly amend securities law to ensure that reporters, commentators and, yes, tipsters, are exempt from securities fraud charges.