Next Scandal: Reporters?
maxfunds.com
Has the pot been calling the kettle black?
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by Jonas Max Ferris 01/27/2004
The last few years have been boom times for financial reporters. Finally some consistently front page grade news has hit the dull world of investments.
The golden age of financial scandals started with the collapse of Enron, and has continued with little pause to engulf companies from the energy, telecom, cable, investment banking, mutual fund, and biotech industries, among others. As the widening Parmalat fraud shows, cooking the books is not just a U.S. phenomenon.
Martha Stewart, the celebrity pimp of perfection, has guaranteed financial reporters mass market readership with her alleged insider trading and subsequent cover-up. The media coverage has shifted into overdrive as her trial begins this week.
Sure Martha’s scheme was fairly low on the towering totem poll of recent white collar crime, but then Winona Ryder wasn’t exactly the thief of the century either. People love it when a celebrity screws up, and a reporter’s job is to write words people want to read.
Has the pot been calling the kettle black? The Thomas Calandra Affair.
Late last week Thom Calandra, chief commentator and former editor-in-chief for CBS MarketWatch, quit after refusing to hand over his personal stock trading history to his employer – a company he founded.
The information request was the result of an informal investigation by the Securities and Exchange Commission. An article that appeared last November in Forbes tipped off the SEC to possible conflicts of interest between Calandra and some of the small-cap companies recommended in his now-discontinued newsletter, The Calandra Report.
According to reports and his own disclosures, Calandra owned shares in thinly traded mining stocks he touted. The SEC wants to know if Calandra violated any disclosure requirements or securities regulations with his personal trading.
Every media outlet has their own polices related to stock ownership by reporters and employees, which range from disclosure rules related specifically to stocks they cover to flat out bans on any stock or bond ownership by the reporter and their families.
The reason for these policies is that reporters can move stock prices just as effectively as analysts can. The power (and value) of the pen was made clear in an early 1980s scandal where a Wall Street Journal reporter sold the names of stocks he was about to feature in the “Heard on the Street” column, before publication.
We don’t know what MarketWatch policies, if any, Thom Calandra violated. More of a concern to Mr. Calandra is whether he violated securities regulations by either pumping and dumping stock or trading on inside information.
Pump and dump is the practice of buying (or otherwise acquiring rights to by grant or derivative) stock shortly before touting to the public (generally with a questionable basis for recommendation), only to sell in the ensuing hysteria and upward price movement for a quick gain.
Although rare, it is possible a financial journalist’s own word can be considered inside information based on how past recommendations have moved stocks, and that a journalist trading their own recommendation could be violation securities laws.
Financial media’s stock-trading rules for employees are often stricter that actual securities regulations. These higher standards are to prevent conflicts of interest, both real and imagined, from swaying reporter’s coverage. Such rules, if followed, will also prevent embarrassing SEC actions against employees which reflect poorly on the media that publishes the information.
While most readers want conflict-free reporting, some also want reporters who trade stocks and are active investors, as that brings a certain level of expertise and interest to the table. These can be conflicting goals for readers.
Some media outlets, notably MarketWatch, SmartMoney.com, and TheStreet.com, allow certain commentators and writers to own stock they write about as long as those writers disclose ownership. These media generally do not classify these writers as “reporters”, but as “analysts” or “insiders” or even just “part time help”. Thom Calandra was not held to the same rules as most MarketWatch reporters.
On January 12th CNBC announced changes to longstanding policy regarding stock ownership by employees. In recent years the financial network has made more of a point of disclosing biases and potential conflicts of interest, both by guests and reporters. This is why, for example, Maria Bartiromo mentioned she owned 1,000 shares of Citigroup during a recent interview with Chairman Sandy Weill. The new policy, when effective, would prevent Maria from owning the stock at all.
Those who already accuse reporters of softballing A-list executives to ensure future interviews were not happy to find out reporters sometimes have large stakes in the company and presume interview questions will take a positive tone, “Mr. Weill, how can other banks compete with you in the future given your company’s clear advantages and your own managerial genius, and what do you have to say about the baseless claims by certain fringe elements about conflicts of interest at your world-renowned investment banking operations?”
What are reporters as allowed to invest in as media companies crack down on potential conflicts of interest, both real and imagined? Mutual funds. The newly revamped CNBC trading policy requires employees to get out of individual stocks by January 2005, but mutual funds are perfectly acceptable.
Traditional open-end mutual funds issue and redeem shares each day to meet shareholder demand. This means a reporter can’t significantly influence the price of a fund even if the reporter’s comments drive new money into (or out of) the fund. The fund would issue more fund shares and the manager would take in the new money and buy more stock in potentially dozens of different names. The fund’s new asset value, or NAV, would hardly budge, except in certain rare instances where the inflows were tens of millions and the funds holdings were less-liquid stocks.
Moreover, mutual fund opaqueness over their own holdings makes them almost a blind trust for shareholders – we rarely even know the exact holdings (except for index funds) so it would be difficult for someone to target certain stocks that wanted to own through indirect fund ownership. Diversification rules mean funds rarely own large stakes in any one stock, making any actions to profit from inside information about a fund holding difficult. |
