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The Right to Be Wrong
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July 04, 2010

The Supreme Court has long held that newspapers and other publications have the right to be wrong, as long as they did not err deliberately or with negligence. As Justice Lewis F. Powell Jr. wrote in 1974, “the First Amendment requires that we protect some falsehood in order to protect speech that matters.” Unfortunately, the court missed an opportunity to uphold that principle when it refused to take an important First Amendment case last week.

In the case, the publisher of a financial newsletter promised a hot stock tip, based on inside information, to people willing to pay $1,000. About 1,200 people agreed to pay, but the tip did not pan out, and the stock failed to soar. The Securities and Exchange Commission sued the publisher for securities fraud, and the lower courts agreed that the publisher, Frank Porter Stansberry and his company, Agora Inc., should be penalized.

It was the first time the S.E.C. had gone after a publisher who did not have a stake in the stock in question. Normally, the laws against securities fraud are designed to prevent insider trading or manipulation by people who stand to profit through ownership of a stock.

Mr. Stansberry’s actions might seem unorthodox or even unethical by the standards of most reputable publishers, but that does not make them illegal. The implications of the S.E.C.’s action are potentially profound: newspapers or Web sites promising their paying readers stock information that later turns out to be untrue suddenly leave themselves open to fraud charges. Any financial commentator who passes on bad information in good faith could be sued.

A large group of newspaper publishers, including The New York Times, urged the Supreme Court to reverse the decision by the Fourth Circuit Court of Appeals that Mr. Stansberry was liable for his actions. In a friend-of-the-court brief, the Reporters Committee for the Freedom of the Press called that decision “a significant threat to the free dissemination of news about the financial markets and specific investment opportunities.”

Without comment, the Supreme Court refused on Monday to review the decision. Congress now needs to fix the problem by adding an exemption for the news media to the securities fraud law, as it has done in other financial legislation. In the meantime, if the S.E.C. does not begin to stick to actual securities fraud and stop whittling at the First Amendment, financial journalism could become more cautious and less robust.

In accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving
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