November 17, 2000
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Flap Between Gilder, Level 3
Raises News-Disclosure Issue
By ROBERT MCGOUGH and SHAWN YOUNG
Staff Reporters of THE WALL STREET JOURNAL
A fracas between influential technology guru George Gilder and a telecommunications company raises the question of whether newsletters adequately disclose their potential conflicts of interest.
The telecom firm, Level 3 Communications, says that it dropped out of favor in Mr. Gilder's newsletter, the Gilder Technology Report, about four months after it declined to pay $100,000 to help sponsor a three-day Gilder-hosted conference that ends Friday in Charleston, S.C.
James Crowe, chief executive of Level 3, says he doesn't know if that is why his firm was dropped from the list. But he calls for Mr. Gilder to "disclose any economic interests that you may have in companies that you pick and pan." He adds: "If he holds himself up as an objective analyst, he owes it to his readers to disclose any potential conflicts."
Mr. Gilder -- whose newsletter has potent power to move stock prices -- says it is "baloney" to assert that sponsorships at his conferences influence his recommendations. He attributes Mr. Crowe's ire to the fall in the price of Level 3 stock when it was dropped as a Gilder pick, adding, "His charges are so silly that I can hardly even talk about them."
No matter who's right, the flap underscores for investors that they don't really know whether newsletters have any financial ties to the stocks they write about. The problem: Newsletters aren't under any requirement to provide information about potential conflicts of interest. The Securities and Exchange Commission doesn't regulate newsletters, other than holding them accountable, like any other investor, for violations of laws concerning investment fraud.
In an interview, Mr. Gilder reviews his list of "Telecosm Technology" companies, the equivalent of a recommended list, and says that nearly three-fourths of the companies never bought sponsorships to his conferences. The closest Mr. Gilder says he has come to adding a company to the list after getting paid involved Motorola and Iridium, a Motorola-backed company. In this instance, Iridium bought a sponsorship, and Mr. Gilder subsequently added Motorola to his list.
"I really do think Crowe was grasping at straws," Mr. Gilder says about Mr. Crowe's criticisms. "The credibility of my list is my most valuable asset. The idea that I'm taking money to put names on the list is utterly devastating to my company. I'd retire before I do that."
But the exchange has prompted Mr. Gilder to disclose more about sponsorships; specifically, he disclosed to The Wall Street Journal which of the 36 companies on his list have paid for conference sponsorships. And he maintains that he has repeatedly disclosed his largest stockholdings, adding that he periodically posts this information on his Web site.
Few newsletters have power to move stocks like Mr. Gilder's. This past Monday, when the Gilder Technology Report was published online and revealed that Level 3 had been dropped as a recommended stock, trading volume in the company's stock leaped, and the price dropped 16%, or nearly $6, to $30.25. The next day, Mr. Crowe complained in a speech at a UBS Warburg investor conference that the stock had been dropped from Mr. Gilder's list after Mr. Crowe refused to pay what the executive calls "a hefty bill" to be a speaker at the Gilder conference in Charleston, according to Dow Jones Newswires.
Why did Mr. Gilder drop from his list a company that as recently as June he described as "poised to change the world?" Mr. Gilder says that his technical analysts concluded that rival 360Networks was more cutting edge, and was executing better, so he added 360Networks and dropped Level 3. In recent months, some Wall Street analysts have widened slightly their estimates for fourth-quarter losses at Level 3, but they have maintained their recommendations and one even raised it. Mr. Crowe says Mr. Gilder is wrong to favor 360Networks' technology.
The stage for the conflict was set in mid-July when Mr. Gilder called Mr. Crowe asking him to speak at the conference. Mr. Gilder says Mr. Crowe declined to be a speaker, citing a conflict; Mr. Crowe says he did agree to speak.
Subsequently, Mr. Gilder's organization contacted Level 3 and asked the company for as much as $100,000 to be a conference sponsor, both sides agree.
Mr. Gilder supplements his newsletter business by holding these conferences, which are attended by investors, analysts, executives and others. While company officials may address conference goers without being sponsors, according to Mr. Gilder, the sponsors have the ability to demonstrate their technology and may set up booths. Sponsorships are routine occurrences at conferences, including some sponsored by this newspaper and by Dow Jones, publisher of The Wall Street Journal and WSJ.com.
Mr. Crowe says he and his staff believed they had to pay in order to speak at the conference -- and they weren't willing to do that. "If we are incorrect, then I missed an opportunity to speak, which is unfortunate," the executive says.
Mr. Gilder, noting that Mr. Crowe had spoken at a prior Gilder conference, adds: "I don't understand how he could make this association."
Mr. Gilder compares sponsorships to advertising, and says there is no influence on him, "any more than the advertisements in the pages of the Wall Street Journal have any influence on what" runs in the news sections, he says.
What stocks does Mr. Gilder hold? He says the "bulk of my holdings" are in four companies: Applied Materials, Qualcomm, Atmel and JDS Uniphase. Of those, only Applied Materials, his biggest personal holding, has never been on Mr. Gilder's list. An associate adds that Mr. Gilder also owns stock in Wave Systems, a company on whose board he sits, but which isn't on Mr. Gilder's list. Mr. Gilder says he has many relatively small stakes that he couldn't name off the top of his head. Mr. Gilder also has personal pension money managed by Velocity Capital, a tech-oriented firm in Palo Alto, Calif., but he says he doesn't know the holdings in the portfolio.
Which of the 36 companies on Mr. Gilder's current list have been sponsors at conferences? Mr. Gilder and an associate cite Qualcomm, Lucent, Ciena, Nortel, JDS Uniphase, Broadcom, Terrayon, Texas Instruments and Conexant. In these cases, they say, the companies were sponsors after they got on the list.
Of Motorola and Iridium, Mr. Gilder was highly critical of Iridium and its technology even as it sponsored his conferences, Mr. Gilder says. Iridium has since filed for bankruptcy.
Counting Motorola, Mr. Gilder thus has gotten sponsorships from 10 of the 36 companies. In the past two years, he has dropped eight companies from the list. Among companies dropped from the list, Qwest, Tut Systems and XO Communications (formerly NextLink) say they weren't approached about sponsorships before being dropped.
Mr. Gilder has been criticized for potential conflicts before. After publishing in May an opinion piece on the editorial pages of The Wall Street Journal that was critical of AT&T Wireless, an editorial in the paper 10 days later faulted the piece for not disclosing Mr. Gilder's investment in Qualcomm, inventor of a technology that competes with AT&T Wireless. Now, Mr. Gilder recalls, he also owned some AT&T stock at the time, albeit less than he owned of Qualcomm.
Why doesn't he regularly disclose his holdings, or the sponsorships by companies he recommends? "It's irritating, this implication that writers can't write about anything without disclosing every possible interest," he says. He says he spent $8 million a couple of years ago to buy out partners of his who wanted to run an investment operation affiliated with his newsletter, because he thought it would present an unacceptable conflict.
Mr. Crowe says he has gotten a few "attaboy" communications from executives who feel tired of being hit up for sponsorships at conferences, or who think more needs to be disclosed about conflicts among analysts and others who give advice about stocks. "It's simply fair disclosure that any objective analyst should make to disclose any potential conflicts of interest," Mr. Crowe says.
Write to Robert McGough at bob.mcgough@wsj.com and Shawn Young at shawn.young@wsj.com |
