AJR  Drop Cap
From AJR,   October 1999

An Ethics Flap in Silicon Valley   

By Kara Newman
Kara Newman is a financial writer living in New York.     

Stories abound about newly minted millionaires created by Silicon Valley stock options. And in the last few months, those headlines have included tales of journalists cashing in on lucrative Internet stock. While it may not be millions, the $9,000 that former San Jose Mercury News high-tech gossip columnist Chris Nolan netted in such a deal and her subsequent reprimand have struck a chord with many journalists, particularly those covering the high-technology arena.

The debate in the press began quickly on whether reporters should be allowed to invest in the industries they cover, and on what constitutes a conflict of interest. Many journalists and ethics experts say Nolan should have known to steer clear of investing in any high-tech company because of her beat responsibilities. However, others--including Nolan herself--say that her punishment was unjustly harsh and that she has become a scapegoat for the editors and management of the Mercury News.

In July, Nolan was suspended and then reassigned as a reporter in the paper's Peninsula Bureau, losing her column on Silicon Valley, for taking advantage of a friend's offer to buy discounted shares of a company. Two editors also were disciplined.

Nolan, whose "Talk Is Cheap" column focused on the gossip of the Valley's high-technology businesses, received an offer from Autoweb.com CEO Dean DeBiase to purchase 500 shares of the Internet car-shopping company at the initial public offering price of $14 a share before it went public. In this sort of deal, frequently known as "friends and family stock," businesses about to go public allot up to 2 percent of the IPO shares to relatives, friends or select business contacts. These shares are usually sold at a substantial discount to the post-IPO price level.

Before accepting the deal, Nolan informed one of her editors of the offer. The editor offered no explicit approval or disapproval, and Nolan took the lack of response as a go-ahead. She said she made about $9,000 by selling her stock within the first two days after Autoweb.com offered stock for sale to the public in March.

Following a story in the Wall Street Journal about Nolan's transaction, the Mercury News took action against her. The San Jose Newspaper Guild has intervened on Nolan's behalf, and at press time the case was in arbitration.

In the September 6 issue of Fortune, Nolan described the deal in an article titled "How I Got A Chance At Dot.Com Wealth." Nolan had told one of her editors of her plans to write the Fortune article before the Mercury News disciplined her.

One hotly debated issue was whether Autoweb.com's DeBiase is a source or merely a friend of Nolan's, as accepting stock options in a source's company clearly would be considered a conflict of interest for a reporter. In a letter to the editors of the Merc, Nolan contended that the CEO is just "a good, longtime friend," and that she felt she could avoid any conflict of interest by not writing about his business activities.

David Yarnold, executive editor of the Mercury News, says Nolan admitted that the Autoweb CEO could be considered a source. In an August 1 editorial, he wrote: "In a meeting Monday with three supervisors and a union representative, Chris talked about her relationship with DeBiase, saying he was a news source when she covered the cable TV industry. She said she and DeBiase regularly talked and e-mailed one another about a range of topics, including high technology companies and the people who run them--information that she acknowledged could be fodder for a high tech gossip columnist."

"I've known Dean [DeBiase] since 1992," responded Nolan in an interview with AJR. "He has not been a source since I came to the Mercury News. He has ceased to be a source." However, the Mercury News editors believe that "once someone becomes a source, he does not cease to be a source and that relationship does not change," she said.

Some media-watchers say Nolan's punishment was too severe, and they've lambasted the Merc's ethics policies for not being widely accessible and Nolan's editors for being too lax about policing her investment activities.

"As someone who was an insider when this affair started and an outsider when it blew up, my take is that both sides have behaved rather badly," says Adam Lashinsky, who was a columnist at the Mercury News and worked alongside Nolan before becoming Silicon Valley columnist for online financial news publisher TheStreet.com in May. "On one hand, Chris shouldn't have purchased the stock, and yet on the other hand, the company could have done more to guide her through this sticky situation."

"I did exactly what reporters are supposed to do when they're faced with the potential for conflicts of interest or other misunderstandings," Nolan wrote in her letter to Mercury News editors, which was never published in the paper but was leaked and posted online by Wired News. "I talked to my editor.... If reporters can't trust editors to help them, they're defenseless."

Nolan's immediate supervisor, City Editor Bert Robinson, received a two-day suspension over the incident, and his department head received a "severe" letter of reprimand, according to Yarnold.

Like many journalism ethics guidelines, the newspaper's policy forbids staff writers to "make news decisions about companies...in which they or their spouse have financial interest." It also stipulates that business writers should not invest in local businesses. However, in a letter printed in The Industry Standard, a print and online magazine covering the Internet economy, Nolan wrote: "Like many people who have joined the Merc in the past few years, I was never shown a copy of the paper's ethics policy.... No one ever mentioned an ethics policy."

Others contend it is incumbent upon reporters such as Nolan to avoid even the appearance of a conflict of interest, regardless of whether an explicit ethics policy forbids or sanctions the activity. "I don't think the public makes those kind of distinctions between the appearance of a conflict of interest and a real conflict of interest," Yarnold says. "Chris took a gift from a source, and you don't do that."

In another incident in-volving journalists and stocks, ABC News medical correspondent Nancy Snyderman admitted in August to violating insider-trading rules after selling shares too soon following the public stock offering on medical Web site Drkoop.com, of which she is a director and columnist. Snyderman agreed to give back the $53,000 profit she netted on the deal. Drkoop.com is an Internet site launched by former Surgeon General C. Everett Koop.

N. Christian Anderson, publisher and chief executive officer of the Orange County Register and president of the American Society of Newspaper Editors, says, for reporters, to invest or not to invest should be "a slam-dunk decision." He says: "In terms of investment you have to be very circumspect about the appearance of conflict of interest as well as actual conflict of interest. So I wonder about any reporter having investment in any industry they cover."

The rules apply to editors as well as reporters. "Some years ago when I was the editor of this paper, I was invited to be on the board of directors of a company," Anderson says. "I said that despite my interest, I couldn't do it because I didn't think any reporter [of the Orange County Register] would be comfortable writing anything that would reflect poorly on that company because I was on the board. Why would we want to put anybody in that position?"