851 F.2d 365 (D.C. Cir. 1988), , S.E.C. v. Wall Street Pub. InstituteInc.

Citation:851 F.2d 365
Party Name:SECURITIES & EXCHANGE COMMISSION, Appellant, v. WALL STREET PUBLISHING INSTITUTE, INC., d/b/a Stock Market Magazine. No. 86-5646.
Case Date:June 21, 1988
Court:United States Courts of Appeals, Court of Appeals for the District of Columbia Circuit

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851 F.2d 365 (D.C. Cir. 1988)




No. 86-5646.

United States Court of Appeals, District of Columbia Circuit.

June 21, 1988

Argued Sept. 18, 1987.

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Appeal from the United States District Court for the District of Columbia (Civil Action No. 82-02000).

Richard A. Kirby, Asst. Gen. Counsel, S.E.C., with whom Daniel L. Goelzer, General Counsel, Jacob H. Stillman, Associate General Counsel and Paul Gonson, Sol., S.E.C., were on the brief, for appellant. Leslie E. Smith, Attorney, S.E.C., Washington, D.C., also entered an appearance for appellant.

Joseph H. Sharlitt, Washington, D.C., for appellee.

Before SILBERMAN and D.H. GINSBURG, Circuit Judges, and McGOWAN, [*] Senior Circuit Judge.

Opinion for the Court filed by Circuit Judge SILBERMAN.

SILBERMAN, Circuit Judge:

This appeal occasions our second review of efforts by the Securities and Exchange Commission to enjoin certain practices of Stock Market Magazine and its corporate parent, Wall Street Publishing Institute, Inc. ("WSPI"). At issue here is the SEC's request, under the anti-touting provisions of the Securities Act of 1933, 15 U.S.C. Sec. 77q(b) (1982), for an injunction that would require the magazine to disclose consideration received in exchange for publishing articles that feature particular firms' securities. The district court denied the requested injunction, characterizing it as a prior restraint prohibited by the First Amendment, 664 F.Supp. 554. We disagree (although not entirely) with the district court's analysis, and so reverse its decision and remand the case for further proceedings to determine whether the requested injunction should issue.


WSPI publishes Stock Market Magazine, a twenty-two year old publication directed to small investors, ten times annually. A few clerical and part-time employees assist with production, but the magazine essentially is a two-person operation, consisting of WSPI's President, Angelo R. Martinelli, who oversees the business end of the publication, and Bernard D. Brown, the Managing Editor.

Despite its limited staff, Stock Market Magazine has attracted a circulation of 15,000, including some 12,000 subscribers. According to a 1982 Stock Market Magazine subscribers' survey, 98% of its readers own securities, with 70% owning securities valued at more than $15,000 and 44% owning securities valued at more than $25,000. The magazine offers its readers financial news in two forms: the first is comprised of the magazine's independently written articles, which offer financial news of general interest, and columns on topics that range from personal finance to national

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politics; the second encompasses longer feature articles, which focus primarily on individual companies.

Each issue typically contains seven or eight feature articles that profile an individual firm, and these articles uniformly portray the subject firm as an appealing investment prospect because of its market position, product offering, or management strategy. Indeed, the articles describe the featured companies in unabashedly glowing terms, as any selection of headlines suggests, 1 and usually include a review of the performance and prospects of the companies' securities. We are told they never contain a negative report, or even reflect mild skepticism, concerning the featured companies or their stock.

According to the SEC and several of its discovery deponents, the articles' lack of editorial balance is not accidental, but is a consequence of the various arrangements by which they come to be written. Some articles are written by the featured company itself, submitted to the magazine, and published substantially as submitted. Others are written by public relations firms paid by the featured companies. And on occasion, the contributing editors of the magazine or Brown himself write articles on a freelance basis. Then also, the writers' fees are paid not by the magazine but by the featured companies. None of these arrangements can be discerned from the firm's masthead, which describes the publicist-writers as contributing editors, and hold out the feature articles as "based on thorough research and first-hand interviews with company officials, economists, security analysts, tax accountants, and other experts." 2

In addition to writers' fees and other amenities, such as free office space, that the featured companies or their publicists provide to Stock Market Magazine's writers, the company articles also appear directly to generate revenue for WSPI. Featured companies regularly purchase article reprints, which are available only through the magazine, and advertising space, which Brown encourages them to place in issues other than the one in which the company article appears, to avoid "unseemliness."

These practices attracted the attention of the SEC, which initiated a civil suit against WSPI under four separate provisions of the federal securities laws on July 19, 1982. 3 Among other allegations, the SEC maintained that the provision of free text (whether directly from the company or a public relations firm), writers' fees, advertising purchases, and reprint orders was a quid pro quo for the magazine's publication of the feature articles, and that failure to disclose this consideration violated section 17(b) of the Securities Act of 1933, 15 U.S.C. Sec. 77q(b), which prohibits publishing a description of a security in exchange for undisclosed consideration. 4

After extensive discovery, the parties filed cross motions for summary judgment in the district court and the SEC prevailed. The district court issued a permanent injunction, requiring WSPI to register as an investment adviser and barring further violations of the securities laws. SEC v.

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WSPI, 591 F.Supp. 1070, 1090 (D.D.C.1984). The injunction included a provision tracking the language of section 17(b). Declining to resolve the dispute as to whether reprint orders functioned as a quid pro quo for publication of the company articles, the court held that the writers' fees were consideration, and that failure to disclose them violated section 17(b). Id. at 1089. WSPI appealed, but this court held the appeal in abeyance pending decision by the Supreme Court of a case presenting similar issues under the Investment Advisers Act, Lowe v. SEC, 472 U.S. 181, 105 S.Ct. 2557, 86 L.Ed.2d 130 (1985).

Lowe involved a First Amendment challenge to an injunction completely prohibiting publication of a newsletter containing nonpersonalized investment advice and commentary. The injunction issued under the same provisions of the Investment Advisers Act, 15 U.S.C. Secs. 80b-3 and 80b-6, that had, in part, supported the district court's order against WSPI. The Supreme Court, avoiding the constitutional challenge, construed a statutory exclusion for "the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation" to include the defendant's investment advice newsletter. 472 U.S. at 204-07, 105 S.Ct. at 2570-72. In light of Lowe, but without consideration on the merits, we remanded this case to the district court for reconsideration.

On remand, the SEC abandoned its claims under the Investment Advisers Act, but continued to press its claims under section 17(b) and under section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b). The district court refused relief on either claim, holding as to the latter that "Stock Market Magazine's representations are not 'in connection with the purchase or sale of a security,' " as required by the statute, and therefore section 10(b) "simply does not apply." SEC v. WSPI, 664 F.Supp. 554, 556 (D.D.C.1986) (August Order). The SEC has not appealed the district court's dismissal on remand of the section 10(b) charges.

With respect to the claims based on section 17(b), the district court concluded that "by designating publications such as Stock Market Magazine as bona fide publications entitled to First Amendment rights," the Supreme Court's decision in Lowe precluded a civil remedy for the statutory violation. The district court held:

Although [the SEC] claims that in seeking injunctions which track the language of the Securities Exchange Act and the Securities Act it is not seeking to enjoin the publication of Stock Market Magazine, the effect of such an Order is clearly a prior restraint which violates the First Amendment. Although the Court's Order does not forbid publication entirely, it does place qualifications on publication which, if violated, could lead to punishment for contempt.... [I]t is the injunction itself, which threatens this punishment before the fact of publication, which violates the First Amendment.

August Order at 556.

Asserting that "[t]he SEC may still bring a criminal action against [WSPI] under section 17(b) if it can show that [the] violations were willful," id. at 556, the district court refused the requested injunction and dismissed the SEC's complaint. This appeal, limited to the issues presented under section 17(b), followed.



In support of the district court's judgment, WSPI argues that section 17(b) does not apply at all to Stock Market Magazine's company articles. 5 According to WSPI, the

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sole purpose of the Securities Act of 1933 is to ensure adequate disclosure of information at the time securities are first sold to the public; therefore, section 17(b) should be read to apply only to original distributions of securities subject to section 5 of the Securities Act of 1933, 15 U.S.C. Sec. 77e.

WSPI argues that the terms "issuer, underwriter and dealer," when used together, refer exclusively to original distributions of securities regulated by section 5, and asserts that "[n]owhere in the 1933 Act did Congress use the term 'issuer' outside...

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