Once in doubt.

• Author: Kry, Robert

SEC v. Park, 99 F. Supp. 2d 889 (N.D. Ill. 2000).

The doctrine of constitutional doubt stands in Supreme Court jurisprudence as a touchstone of judicial caution. We are told that when the "validity of an act of the Congress is drawn in question, and even if a serious doubt of constitutionality is raised, it is a cardinal principle that this Court will first ascertain whether a construction of the statute is fairly possible by which the question may be avoided."(1) In most of its applications, this principle makes sense. But is it at least sometimes preferable to stake a decision on constitutional grounds when a statutory alternative presents itself? I argue that it is; that in 1985, the Supreme Court declined to do so; and that the recent district court ruling in SEC v. Park(2) demonstrates the price that we are paying for its error.

I

Gun Soo Oh Park is known to his readers as Tokyo Joe. In 1997 and 1998, Park gained notoriety as an Internet stock-picking gum. He began by posting messages to financial bulletin boards, and in July 1998, he established a website at tokyojoe.com. Part of this site was accessible only to paying subscribers of Societe Anonyme, a corporation that Park established. Park posted his stock picks at his site, operated a members-only chat room (to which he often contributed) and sent out stock alerts by e-mail to his subscribers. Over the following year, Park's paid following grew to 3800, generating more than $1 million in revenue.(3)

The litany of charges that the SEC brought against Park will sound familiar to those versed in cyberspace boiler-room antics. The SEC charged that Park engaged in "scalping" by failing to disclose his interests in stocks and then manipulating the prices of those stocks through his recommendations for his own financial gain. It charged that he acted as a tout by accepting undisclosed compensation in return for promoting a company's stock. It further accused him of outright misrepresentation, saying that he falsified his track record and lied about his own buying and selling activities.(4) Based on these allegations, the SEC charged Park with fraud under the Investment Advisers Act (IAA).(5)

Park defended himself by arguing that he did not give out "personalized" advice and was thus not an investment adviser who could be charged with fraud under the Act.(6) To understand the significance of this distinction, we must turn to the Supreme Court's 1985 decision in Lowe v. SEC.(7)

The Investment Advisers Act does not, by its terms, distinguish between personalized and impersonal advice. Rather, it excludes from coverage "the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation."(8) In Lowe, the Supreme Court considered whether the SEC could force the publisher of an investment newsletter to register as an investment adviser.(9) The SEC had interpreted the publisher exemption to apply only when the publication was "not primarily a vehicle for distributing investment advice."(10) Lowe argued that the registration provision, so construed, was an unconstitutional prior restraint on the financial press.(11)

Avoiding this constitutional argument, the Court rejected the SEC's interpretation of the IAA in favor of a broader statutory reading of the publisher exemption. Culling from the legislative history, it held that Congress's primary concern was with those who gave personalized advice to specific clients.(12) Lowe did not fall within this category.(13) While basing its decision on statutory grounds, the Court strongly intimated that its interpretation was driven by constitutional considerations.(14)

Justice White, joined by two others, concurred only in the result. He criticized the Court's statutory interpretation as being inconsistent with the legislative history and insufficiently deferential to the SEC.(15) He would have decided the case by holding the registration provision unconstitutional as applied.(16) Justice White thought that imposing a professional licensing requirement on one who does no more than render advice is constitutional only where the advice given is tailored to the recipient and a "personal nexus" exists between the speaker and his advisee.(17) An impersonal publisher like Lowe did not meet this standard.

At first glance, the majority and concurring opinions may seem similar. They both led to the same result and relied at least in part on the concept of personalization. The consequences of the majority route, however, were far-reaching. Because the majority staked its decision on the statutory definition of an investment adviser, its holding excluded impersonal publishers not only from the registration requirement, but also from the antifraud provisions of the IAA, which of course do not pose any constitutional issue at all.(18) The concurrence's approach would have excused impersonal publishers from the registration requirement but left the antifraud provisions in force.(19) The majority's decision has been widely criticized for impairing the SEC's ability to enforce the antifraud provisions of the IAA.(20)

II

SEC enforcement capability may not be the most serious casualty of the Lowe majority. That opinion also threatens the constitutional freedom of the press. To see why, we must return to Park and observe how Lowe shaped the district court's handling of the case.

The Park court rejected the defendant's claims that he provided only impersonal advice.(21) It based its decision on four factors: (1) that Park "allegedly sent e-mails directly to individual e-mail accounts, advising subscribers individually through their e-mail accounts of stock picks"; (2) that Park "answered individual questions posited by subscribers in [his] chat room"; (3) that "[Park] discussed [his] stock picks in...