16
April
2007
|
01:40 PM
America/Los_Angeles

Rivals.com CEO threat to TechCrunch is a toothless attempt to indimidate

So far as I can tell, the lawyer letter that Rivals.com CEO Shannon Terry sent to TechCrunch's Mike Arrington, accusing him of defamation and demanding a retratction, is pure bullshit.


Friday morning Arrington wrote that Terry "committed" securities fraud while a principal at SGA Goldstar Research, he and two others were accused of a "massive ongoing market manipulation” scheme. The others were sentenced to federal prison. Terry cooperated and got off with a $828,000 fine, Arrington wrote, pointing to an SEC document and a magazine article. (Technically, the 828K was a disgorgement, not a fine.) In a 1998 complaint against Sheldon Kraft, the SEC uncontrovertibly accused Terry of illegal manipulation of the stock of a company called Systems of Excellence:

The Complaint alleged a massive ongoing market manipulation
orchestrated by Huttoe in which he executed an unregistered distribution of
tens of millions of SOE shares. The Complaint further alleged that Huttoe
artificially inflated the price for those shares by issuing materially
false press releases about nonexistent multimillion dollar sales of SOE
products, filing false periodic reports with the Commission, and bribing
with SOE stock persons to tout SOE stock, including Melcher and Terry. As
a final part of the scheme, Huttoe, Melcher, and Terry then took advantage
of the inflated market by dumping shares on unwitting investors. On
January 29, 1997, the Commission amended the Complaint to allege that in
addition to touting SOE stock, SGA Goldstar, Melcher, and Terry engage in
a systematic practice of publishing promotional coverage for other issuers
in exchange for compensation.


This 1999 article describing the scheme
makes it clear that Terry was a relatively small player in the scheme. Kraft, Charles Huttoe and Goldstar owner Theodore Melcher were the major players
in the scheme to talk up the value of the stock through spreading lies about incoming business and acquisition negotiations. When the price
did triple, the conspirators sold and made millions. What do you call that? Pump and dump.



An employee of SGA Goldstar Research, Shannon Terry, was found to

have violated the anti-touting and antifraud provisions of securities

laws by a U.S. District judge. The court ordered Terry to disgorge

$828,000 of trading profits.




Note that Terry was ordered to "disgorge" $828,000. That's how much, according to the court, he made from the illegal scheme. Kraft by comparison paid $1.1 million and got a probation sentence for cooperating with investigators, though he could have been sentenced to up to five years in jail. Huttoe was sentenced to 46 months in jail.

So to be clear, from the record. Terry was found guilty in federal court and paid out more than $800,000 in ill-gotten gain. The case was a big deal, with the most central character doing jail time.

So now comes Terry, alleging that Arrington's report is false and libelous and demanding a retraction. In my opinion, Arrington should decline the offer on several grounds: truth, lack of "actual malice," lack of inury and lack of jurisdiction.

Truth is an absolute defense. If what Arrington published is substantially true, Terry has no case. The burden is on Terry to prove the falsity of the claims. So lets go throught the claims.

1. That the headlines "committed securities fraud" and "was involed in fraud" clearly imply that Terry is presently involved in securities fraud.


Sheer nonsense. The reference to fraud is clearly in the past. It would take a tortured reading to come up with that interpretation; even if a reader did, the text makes it clear that the fraud occurred in the past.

2. No finding that Terry was involved in a pump and dump scheme was made.

Bullshit. Terry was found guilty of exactly that, as described above.

3. Terry was an employee not a principal of Goldstar.


Assuming that's true - and that's what the magazine article says - so what? It's not defamatory to say that someone was a principal rather than an employee. Under the Supreme Court decision Gertz v Welch, the plaintiff must show actual damage. This is simply a nonmaterial issue of fact which causes no damage.

4. No charge of stock manipulation was made against Terry in 1998. The statement infers that Terry was a coconspirator of Kraft and Huttoe.

The SEC document charging Kraft is dated 1998. If the charge actually was made in a prior year, it is disingenuous to deny the statement based on a technicality. I don't know what the law is around inferences but an inference that Terry was a coconspirator is pretty legitimate.

5. The statement that "Terry cooperated with authorities" and "got off with a fine" are false and defamatory.

Based on the magazine article, it seems that Terry never faced a prison term and it's not clear that he cooperated. But again, he would have to show that this inaccuracy is material to his claim. It hardly seems so. The fact that he disgorged his profits indicates the gains were a violation of security law.

Finally, even if this last inaccuracy is material and Terry suffered actual damages (that is, the Yahoo deal falls apart) he would have to show the deal fell apart because of Arrington's article - that is, that Yahoo wouldn't have found it by due diligence. Hard to believe, since Mike found it so quickly.

If Terry were to try to collect punitive damages, he would have to show "actual malice" on Arrington's part under the Supreme Court's Gertz decision. Actual malice is knowingly publishing a falsehood or "reckless disregard" for whether it was true or not.

There are more claims in the letter but they all pretty much come out the same. The bottom line: eveyone knows that lawyers send scary letters trying to achieve the client's aims without the risk and expense of actually going to court. This letter is nothing more than a toothless "scary lawyer letter."

And one final point. The rationale in Gertz for having a lower standard to collect on actual damages was that private citizens have much worse access to the press to set the record straight (as opposed to the New York Times v Sullivan case, where actual malice was the standard for libel actions by public officials). Arrington's offer to run a piece by Terry unedited and prominently shows that the weaker access rationale is substantially weaker in the Internet era.