Walking a Tightrope   

Journalists covering Wall Street have to be particularly careful to avoid conflicts of interest.

Recently, an electrician came to fix some wiring in my apartment. Making small talk, he asked what I do for a living. So I told him: I'm a financial reporter. Looking around my tiny, sparsely furnished studio, he said, "So if you know so much about the stock market, how come you aren't rich?"

It's a good question, one that financial journalists have been grappling with for decades. Aside from the perception that journalism overall is a notoriously underpaid profession, financial journalists are in the precarious position of possessing intimate knowledge of how money is made: which money managers know how to handle it; what stocks are high-fliers; where the loopholes are in the system, etc. But playing the market, particularly in the areas with which the reporter is most familiar, is considered questionable.

At worst, a journalist can be accused of insider trading, particularly if the journalist is believed to be trading on information ahead of publication, before that information becomes public knowledge and, therefore, fair game.

Perhaps the best-known case of alleged illegal trading is that of Dan Dorfman, a commentator for the cable network CNBC and former columnist for Money magazine. According to news reports, last year Dorfman came under investigation by the Securities and Exchange Commission for possible illegal insider trading and other violations of securities laws. Dorfman--who identifies himself as a journalist, not a financial analyst--is renowned for juicy tips and commentary on publicly owned companies that often move the stock market.

Critics within the press and the financial industry have alleged that Dorfman illegally manipulated markets, paying off and receiving money from a Long Island stock promoter. Questions have been raised in media reports as to whether Dorfman received payment for mentioning certain companies on air. Although the stock-picker has not been charged, Money magazine fired him in January of this year for refusing to reveal his sources after the publication initiated an internal probe into the matter. In an internal CNBC review he's been cleared of all charges. Dorfman is still employed by CNBC, although at press time he was on leave, having suffered a minor stroke. Dorfman was not available for comment, but a CNBC spokesperson says he was never formally charged by the SEC.

Veteran journalists also remember the case of R. Foster Winans, a former Wall Street Journal reporter who wrote the "Heard on the Street" column. In 1987 he was convicted of insider trading, as well as violating criminal mail and wire fraud statutes, after divulging the contents of upcoming Journal articles to friends and associates who then traded on the information.

Financial journalists can have a tough time juggling two priorities: seeking to be thorough and objective without appearing to be disseminating insider information. In order to maintain credibility with a highly skeptical readership, reporters need to carefully balance beats with personal investments and avoid even the appearance of a conflict of interest.

"The public expects the media to be beyond reproach, even beyond the appearance of reproach," says Tom Plate, a visiting professor of media ethics at UCLA. "The same ethical standards we ask public officials to adhere to, we should adhere to. The integrity of the media is central to its credibility.

"Ultimately, in the United States the media is a trust," Plate adds. "Just like when you go to a doctor, you want the right medicine, not something he gets a kickback for."

The appearance of strict objectivity is essential. Just as business journalists are expected to refuse gifts of value from companies on which they report, financial journalists are expected to refrain from holding stock--in effect, part ownership--in companies they cover.

Most publications have established guidelines to help reporters in this regard. Many prohibit financial journalists from making short term investments (usually defined as stocks, bonds or other financial instruments held for less than six months) or from investing in stocks altogether. Mutual and index funds generally are considered acceptable because the investor is not aware of what is being bought or sold each day.

"It's hard enough to own stock even if your motives are pure," says William Power, assistant news editor of the Wall Street Journal's Money & Investing section, where staffers in both the editorial and advertising departments are forbidden from making short term investments. Also, reporters are required to sign a conflict of interest policy annually. "It's not enough to be incorruptible," says Power. "You have to avoid the appearance of problems."

Herb Greenberg, the San Francisco Chronicle's financial columnist, sums up the situation: "If you are covering a [financial] beat, forget [owning stocks], no matter how good it sounds." Although the Chronicle doesn't have a formal policy, Greenberg doesn't own any stocks or mutual funds. "I own my home," he says of his investment portfolio.

CNBC officials declined to discuss the matter of ethics, but issued the following statement to AJR: "In light of the nature of CNBC's business and need to protect the reputation and interest of journalistic integrity and objectivity we've instituted strict integrity policies in regard to securities ownership. CNBC conducts ongoing awareness policies to ensure all staff members understand these policies and recognize the importance of maintaining our integrity." A CNBC spokesman declined to elaborate. Indeed, at many media outlets, such standards are fluid. Critics compare it to the notorious "community standard" for pornography--authorities can't define exactly what it is, but they know it when they see it.

Some journalists adopt their own policies if none are proffered by employers. "I consider myself bound by the Front Page Rule," explains Newsweek's Wall Street editor, Allan Sloan. "I will not do any transactions I would be ashamed to read about on the front page." A spokesperson for Newsweek says she doesn't know if the magazine has a formal policy but that it's standard practice for reporters to tell their editors about any conflicts they might have.

In terms of more formal protocol, Sloan supplies an annual listing of his and his family's "significant holdings" to his immediate supervisor and discloses the appropriate holdings to readers when he thinks it's necessary.

Speaking of families, it's usually best to apply company policies to family members as well, journalists counsel. For example, the Chronicle's Greenberg recalls the Toys 'R' Us stock he considered purchasing for his children a couple of years ago. "I wanted my kids to learn about investment," he says. "But even at that level, my wife and I nixed the idea as too risky."

Many consider disclosure of holdings to be the simplest solution. If a journalist who owns stock in company XYZ is reporting on developments at the company, a footnote or disclosure in the body of the article often is considered to be ample insurance against conflict.

But disclosure presents its own set of problems. "If I do that [disclose], I'm putting my stamp of approval on it," argues the Chronicle's Greenberg. "Then I'm like an adviser."

And sometimes, despite all the appropriate disclosures, a journalist in the awkward position of reporting on a security he or she owns has no choice but to take a loss on that holding.

Newsweek's Sloan recalls one such case when he wrote a business column for the now-defunct New York Newsday. "I had this weird situation where I had made a significant investment in the bonds of a bankrupt company called LTV, long before it ever occurred to me to write about it," Sloan says. Later the company became a news story, and it fell to Sloan to cover it.

"This is a case where if I sell the bonds, I'm doing wrong; if I keep the bonds, I have a conflict of interest; and if I don't do anything, I'm not doing my job," he says. In the end, he handled the situation by performing no bond transactions, disclosing the holdings to readers, writing the story and suffering a 40 percent loss in the process.

Sloan acknowledges, however, that if he had not researched and subsequently purchased the bonds in question, he also probably wouldn't have recognized the significance of the news story. "So, to some extent, the readers benefited, if you think the story is any good," he concedes. "I had information I wouldn't otherwise have had."

Some critics believe it is helpful, rather than harmful, for a financial journalist to have personal investments that may be affected by reportage. It keeps the reporter honest, they say, if he or she stands to lose money.

New York Times financial columnist Floyd Norris calls it "the humility factor." Norris, with the Times since 1988, says, "I think there are benefits to having financial journalists invest. If nothing else, they can benefit from losing a little money occasionally."

That was not necessarily the case in one of the better-known scandals involving James J. Cramer, who wrote about thinly traded stocks for SmartMoney's "Unconventional Wisdom" column. Some of those same securities were traded by his own investment firm, Cramer & Co., according to reports at the time. As a direct result of his recommendations, the reports said, a number of the stocks surged. This included UFP Technologies, whose stock price doubled in just two weeks following Cramer's published recommendation in January 1995, netting a tidy $2.5 million profit for Cramer.

Cramer denied in press accounts that he "profited or sought to profit" from the column's impact. Later that year the personal finance magazine adopted new rules restricting nonstaff contributors from writing about stocks they own and which prices could be influenced by a recommendation in the magazine. Staff writers already were restricted by a Dow Jones conflict of interest policy (SmartMoney is owned by Dow Jones & Co. and Hearst Corp.)

Many financial journalists say that there is a wide gap between Cramer's activities and their own, chiefly because Cramer was a money manager first and a journalist second.

However, Cramer's gaffe was enough for the journalistic community to all but crucify him. In the Washington Post, columnist James K. Glassman vilified Cramer's actions as the beginning of "the next great American scandal." As long as Cramer was identified as a journalist, he wrote, simultaneously running a money management firm was an "irreconcilable" conflict.

In a letter to the Post, Cramer snapped back: "If my perceived status as a 'journalist' is the dispositive factor, how do I get unperceived?" Cramer asked. "Is there some way I can be delisted? What if I just 'tell' my column to a card-carrying 'journalist' who then writes it for me? Will that solve the 'irreconcilable conflict?' "

Cramer says he feels he was put through the "media wringer" and still maintains that he never sought to profit from his columns. Although Cramer never went to court, he says, "I had my life turned upside down, I spent hundreds of thousands of dollars in legal fees, I was pilloried by Money magazine [and other media outlets] and no one ever apologized or printed the truth."

Some say the uncertainties over conflicts of interest exist in part because financial journalism is still a relatively young field; up until the go-go 1960s market boom, finance was considered to be the backwater of journalism, primarily consisting of dry stock quotes and press release rewrites.

"It was the Sahara of journalism until 20 years ago," explains Edwin Diamond, veteran media critic and New York University journalism professor. "The hot reporters were covering politics, Washington. Then Wall Street went Main Street." A soaring stock market coupled with the emergence of high-profile journalists such as Adam Smith, author of "The Money Game," helped finance emerge as more of what Diamond calls a "glamour beat."

A number of critics say the problem is exacerbated by the proliferating technology that has turned up the already frenzied pace on trading floors and in newsrooms. Individual investors snap up financial publications and troll the Internet in search of the hottest investment strategies. One look at the financial section of the newsstand shows an ever-growing number of magazines trumpeting the "10 best stocks for the 1990s."

"It bothers me that so much of financial journalism is 'Buy this fund, buy that fund,' " Newsweek's Sloan says. "It's society's disease, and it's being pandered to by financial journalism. 'There's three easy steps to make a million dollars and retire by the age of 12 years old. It's simple, it's mindless, and you'll be on easy street before you brush your teeth in the morning.' That's just nonsense."

After all, Sloan says, "if I knew what would happen in the stock market, I would be out being independently wealthy, and not sitting here scribbling for a living."

Another part of the problem, critics contend, is that sometimes reporters tend to parrot sources wholesale, without analyzing the background of the company or security in question, or without analyzing the background of a source who may be putting a particular spin on his or her comments. In some cases, it can place the unwitting journalist at risk of passing along a conflict of interest.

This can affect both novice journalists, who mistakenly take source comments at face value because they lack crucial background knowledge, as well as more experienced journalists, who should know better but often can't pass up juicy tips under deadline pressure.

"For many financial journalists, the most bothersome question is whether a source is using a journalist for a quick profit," Floyd Norris wrote in a New York Times column. "There is little doubt that incompetence is a bigger problem than venality in financial journalism."

To combat the problem, Norris offers a few suggestions: First, "the obvious thing to avoid [being manipulated] is to learn, and for editors to hire reporters who know, or to train them." However, this is often easier said than done, he admits. "Journalism doesn't pay as well as Wall Street, and [knowledgeable] people are likely to want to work on Wall Street and be paid more."

Basics include knowing how to read a balance sheet and other financial statements, as well as rudimentary accounting. "What's amazing about our system is how much companies disclose and how little is read. Many of the best [financial] columns are by people who study annual reports and analyze footnotes," Norris says.

Another safeguard is to restrict the use of anonymous sources, the likes of which have tripped up CNBC's Dorfman and colleagues. Accountability is key.

Remember the old J-school adage: confirm, confirm, confirm. "It's like the police beat reporter who receives an anonymous call that there was a shooting at First and Elm. The reporter can confirm it" without quoting the anonymous source, Norris explains. Similarly, a financial reporter can confirm many statements by reviewing a company's annual report or balance sheet.

In short, the rules of the game vary from institution to institution, but the goal remains the same: to keep the reader's trust. It's an increasingly difficult task in financial journalism, where passing on hot tips to the reader--and subsequently moving markets--can transport the reporter from the role of objective observer to that of market guru.

Like separation of church and state, many journalists feel their personal investments are private matters and shouldn't even be a consideration in the workplace. But until conflict of interest problems cease to exist, financial reporters will want to pay particular attention to the condition of their financial affairs. Not only is this likely to improve the state of one's portfolio, but for reporters, it may prevent an embarrassment of riches from turning into just plain embarrassment.