(the "great") Warren Buffett's friends : Washington Post and Newsweek ... running ads for a fraudulent Ponzi scheme operator.
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(From the message I am replying to :
"Mr. Buffett -- who is known for preaching the importance of
managing with integrity ..." )
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WSJ -- Pinnacle Ads Escaped Vetting By Publications
October 18, 2006
Pinnacle Ads Escaped Vetting By Publications
By ZACHARY M. SEWARD
Scanning the classifieds in USA Today this spring -- amid herbal remedies, discount retailers and the crossword -- Darrell Williams paused over an enticing offer from an unfamiliar Atlanta real-estate firm: a 25% return on his money in 60 days.
Mr. Williams, a financial adviser in Colorado Springs, Colo., says he was skeptical at first, but his interest grew as he spotted similar offers from Pinnacle Development Partners LLC in other publications, including a full-page ad in Newsweek. "They kept showing up in magazines, national magazines," says Mr. Williams, who invested $40,000 with Pinnacle. "And I thought to myself, well these guys aren't trying to hide and disappear."
Now some investors and experts on financial fraud are asking why Newsweek and other respected publications accepted Pinnacle ads promising such improbably high returns. Last week, a federal court shut down Pinnacle's business and froze its assets after the Securities and Exchange Commission accused Pinnacle of operating a nationwide Ponzi scheme, in which returns are paid with other investors' money.
['Stocks still low?']
Pinnacle touted its 'relationship' with Newsweek, which ran this full-page ad.
An initial examination of Pinnacle's books has found the company took in more than $60 million from investors, according to a person familiar with the matter. A lawyer for Pinnacle's chief executive, Gene A. O'Neal, says his client didn't engage in fraud.
The SEC said Pinnacle raised money through "an extensive national advertising campaign" in some 40 publications. They included USA Today, The Wall Street Journal, the Washington Post and the Los Angeles Times -- four of the five most widely read newspapers in the country. The SEC said the advertising itself was illegal, irrespective of any fraud, because Pinnacle hadn't registered with the commission to sell securities.
"The first sign that should put everyone on notice -- investors and newspapers -- is a promise of outlandish returns," says Kelly Bowers, an assistant regional director for the SEC.
Reputable publications typically review every ad they accept, from classifieds to full-page spreads, to conform to internal standards. Those flagged as potentially libelous, illegal or offensive to readers are passed along to lawyers for a more-rigorous review. Publications say they don't endorse ads that they run.
In a perfect world, ads with spurious claims would be instantly recognized and rejected; that such isn't the case often shocks readers and dismays Mitchell Zuckoff, a professor of journalism at Boston University. "There's a compact of trust between publications and their readers," says Mr. Zuckoff, who wrote a biography of Charles Ponzi, namesake of the scheme. "I trust the article that runs right next to the ads, right? I should be able to trust the ads as well."
But legal precedents and contracts with advertisers generally protect publications from liability for running ads that turn out to be fraudulent -- which is the way it should be, says Floyd Abrams, who specializes in free-speech issues and media law at Cahill Gordon & Reindel in New York.
"Society cannot ask, and the courts will not ask, of newspapers that they do the equivalent of investigative journalism to check out the bona fides of their advertisers," Mr. Abrams says. He says further that publications are hesitant to vet their advertising, or at least tell readers they do, because "if they fail to identify the fraudulent ad, they might be in more trouble than if they hadn't started down that road in the first place."
Media groups say there are no industry standards for reviewing investment offerings in ads. Howard Polskin, a spokesman for the Magazine Publishers of America, says, "We believe that it is the responsibility of advertisers to make sure their ads are not misleading."
Obeying securities laws is left to the advertiser, not the publication, according to the Federal Trade Commission, which regulates business advertising. Paul Davis, an attorney for the FTC in Atlanta, says the government held "very pointed discussions going back to the early '80s" over whether action could be taken against publications that run deceptive or misleading ads. "And the answer was simply no," he says, because the ads are protected as free speech under the First Amendment.
The FTC has tried to make publications more vigilant, with tips on spotting fraudulent schemes. "Any representation of high earnings with little or no risk, skills, or training is likely to be false and misleading," the commission warns in a brochure, first written in 1997 and regularly distributed to state press and publishers' associations.
Some publications also include disclaimers with their classified sections, imploring readers to use caution with business solicitations and providing contact information for the FTC or their local attorney general's office. "It's really up to investors to look skeptically on any advertiser who's guaranteeing returns of any sort," says Albert Meyer, general partner of 2nd Opinion Research, who helped expose the Foundation of New Era Philanthropy as a Ponzi scheme in 1995.
Washington Post Co.'s Newsweek began running a campaign by Pinnacle in April and pulled the ad in September after receiving "an official inquiry" about the company, a spokeswoman said. She declined to discuss internal vetting policies in detail but said, "There's no special screening process for investment advertising."
Newsweek won't say how many times it ran Pinnacle ads, but at least 15 were found in the magazine during the April-September time period. Those ads would have raised $3 million for Newsweek, according to the magazine's published rates, even allowing for a multi-appearance discount.
The Pinnacle ads typically ran in newspaper classified sections and began with a question: "Stocks still low?" Mort Goldstrom, vice president for advertising at the Newspaper Association of America, says while "every newspaper reads every single ad before they accept it," frauds can slip into classified sections because "you've got much more volume."
The Wall Street Journal ran 123 classified ads for Pinnacle in a 10-month period. The last ad ran in the Personal Journal section on Sept. 21, the same day a news article first raised questions about Pinnacle's claims. That ad promised returns of 25% in 60 days; an earlier version said that returns could be earned in 45 days. A spokesman for Dow Jones & Co., publisher of the Journal, declined to say how ads are screened before publication. Barron's, a weekly magazine published by Dow Jones, also carried Pinnacle ads.
A spokesman for USA Today, published by Gannett Co., said all ads are undergo a standard review, but wouldn't comment specifically on Pinnacle. The Washington Post declined to comment, and a spokesman for Tribune Co.'s Los Angeles Times said, "We generally limit our review to those ad categories that previously have raised legal concerns or prompted reader complaints."
Pinnacle appears to have used its advertising campaign not only to generate revenue, but to gain credibility as well. A company newsletter dated June 2006 touted Pinnacle's "new business relationship" with Newsweek and noted, "We are anticipating the addition of many new investors as a result of our advertisement in this renowned publication." Several investors say they were told by Pinnacle employees that Newsweek had run background checks on the firm. (The magazine's spokeswoman wouldn't comment on that, since it has to do with Newsweek's vetting process.)
Pinnacle's classified ads were generally short on details but promised "Quick Profit" in "the Booming Atlanta Market." The Newsweek ad explained some of the business, saying Pinnacle bought and sold "distressed properties" in Atlanta. In reality, Pinnacle merely passed the real estate from one group of investors to another, according to the SEC.
Among investors attracted by Pinnacle advertising was Keith Ellis, a postal worker in Washington, who spotted the company's ad in the Post and put in $5,000. Ken Carraway, a real-estate broker in Los Angeles, saw an ad in the Times and eventually invested more than $150,000. Marvin Reyes, an information-technology specialist in Floral Park, N.Y., saw ads in the Journal and Newsweek and invested $25,000.
Mr. Reyes says he performed his own research on Pinnacle, speaking with other investors and checking with the Better Business Bureau in Atlanta, but was most persuaded by the company's ads. "If these guys are advertising with a full-page ad in a publication like Newsweek, they have to be legit," he remembers thinking.
Write to Zachary M. Seward at zachary.seward@wsj.com
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