Journalism

[first day]

One thing that I think about sometimes is the similarity between journalism and insider trading. Consider: You are in the business of finding out things about companies that nobody else knows, so you spend your time developing sources at those companies who will tell you things. If their company has a new product coming out, or is about to announce a merger, or has been doing fraud, they call you to tell you before anyone else knows.

Sometimes they tell you things just because you ask, and they are indiscreet. Sometimes they tell you things out of a sense of public-spiritedness: They think that what they know should be known more broadly. Sometimes they tell you things out of a sense of grievance: They are mad at their bosses and want to leak information. Sometimes they tell you things because you are friends: You have done such a good job of developing relationships that your sources think of you as a personal friend, not just a transactional counterparty. Sometimes there is some amount of favor-trading involved: You get information from them, and in exchange you give them something that they want. Perhaps that is also information: You give them news or gossip about their firm or industry that you got from other sources. Or perhaps you can give them career advice. Or maybe you just buy them lunch, or drinks. Maybe you pay them cash![1] Often, of course, their motives are mixed; they tell you stuff out of public-spiritedness and grievance and friendship and favor-trading and carelessness all at once.

What do you do with this information? Here are three possibilities[2]:

1. You work at a newspaper, you write up a story containing your sources’ secret information, and you publish it on your website and in your print newspaper.

2. You work at a hedge fund, and you trade on your sources’ information: You buy ahead of the merger announcement, sell ahead of the accounting fraud, whatever.

3. You work at a very small and odd newspaper, one that charges $1 million a year for a subscription and that has only five subscribers, all of them hedge funds. You write up a story containing your sources’ secret information, you put it in your newspaper, and you send it to your subscribers, who then trade on it.

Option 1 is called “journalism.”[3] It is generally considered a good thing — the public has a right to know secret stuff, etc. — and in the US it is protected by the First Amendment.[4] Of course some of the readers of your newspaper will trade on what you publish, but that’s fine; journalism can move markets.

Option 2 is usually called “insider trading,” and in most cases, in the US, it is illegal.[5]

Option 3 is a gray area! It seems clear to me that if you have one subscriber and a million-dollar subscription, that’s insider trading: You work for a hedge fund, but you have an obfuscatory job title. Probably at five subscribers it is still insider trading.[6] On the other hand, at a million subscribers and a $200 subscription, you are clearly a journalist: Publishing a story behind a paywall, to paying customers who get it before everyone else, still counts as journalism.

Disclosure! Bloomberg News publishes many stories to Bloomberg Terminal subscribers before they are on the website. But that is still journalism.

I think that probably the dividing line between “journalism” and “insider trading” is, like, some number of subscribers? The number is not that high. I think that sending a newsletter to 50 subscribers, 95% of them hedge funds, for $50,000 each per year, probably looks more like journalism than like insider trading. Whereas five subscribers is insider trading. But I am just making that up and oh boy is it not legal advice.

Anyway the Financial Times reports:

I don’t know! The two claims here are:

1. You “break news” and “publish market-moving investigative pieces ‘like Bloomberg,’” which means that you employ reporters who get sources to tell you stuff that is not already public, and

2. You produce “stories based on publicly available material.”

There is some overlap between those categories. Sometimes you can, like, read a company’s securities filings closely, notice something weird, publish a story saying “Company X admits Y in its annual report,” and say you have broken news and moved the market with your investigation of public documents, without using “information that was not publicly available.” Or Freedom of Information Act requests are a common journalistic tool that can get you information that is technically public and yet known only to you. You can buy a company’s product and take it apart and see if it’s made of cobwebs. Other things. Still I feel like a lot of investigative journalism involves calling sources and asking them to tell you stuff that isn’t public? And then if you publish it that’s fine, that’s great, that’s classic journalism. But if you trade on it first, that’s riskier.[7]

Of course, there is another obvious comparison for this model. What is, like, Hindenburg Research if not an investigative reporting organization that trades on its investigations before it publishes them? The whole model of activist short selling looks pretty much like this: You try to find public companies that are frauds, you investigate them, you short their stock, and then you publish your investigation, hoping that it will drive the stock down. Carson Block, another activist short seller, “describes what he does as ‘investigative journalism married to a different business model’ and is trying to rebrand activist shorts as ‘journalist investors.’”

The risks of that model are pretty well known. For one thing, yes, insider trading; some short sellers try to rely mostly on public information to avoid being accused of insider trading.[8] For another thing, activist short sellers are constantly accused of market manipulation: It is just widely assumed that, if you bet against a company’s stock and then publish bad stuff about the company, you are doing something fraudulent and manipulative. If you publish stuff that is wrong, you will get in trouble for securities fraud: Betting against a stock and then publishing falsehoods about the company to drive down the stock is classic fraud, and no one will be sympathetic if you say you made an honest mistake. Even if you publish stuff that is right, people will be suspicious. There is an ongoing US Department of Justice investigation of activist short sellers, “probing possible coordination surrounding the publication of short reports, looking for signs of market manipulation or other trading abuses.” Is Hunterbrook/Watchdog's whole business model a “sign of market manipulation or other trading abuses?” I don’t think so, but I bet some people will.

Journalism

[second day]

We talked yesterday about insider trading, journalism, and a startup hedge fund / investigative journalism outlet called Hunterbrook, which plans to report big investigative stories, trade on them, and then publish them. I want to mention a few bits of follow-up.

First, I got an email from someone who works at a financial firm saying[a]:

We’ve observed a certain very low-quality source move stocks with low-quality takeover rumors. Given the impact the source can have, we wanted to subscribe. So we sent them our usual due diligence questionnaire that included the question “do you seek out inside info,” to which they replied “lol yes of course that’s the point” (paraphrasing). So of course then we can’t subscribe.

But they can subscribe to the Wall Street Journal, and to the Bloomberg Terminal, even though Journal and Bloomberg News reporters do call up sources inside companies to try to get nonpublic information and then publish it. If you work at a hedge fund, you are not supposed to trade on inside information, and it is standard practice to make sure that your data vendors do not give you inside information. If one of your data vendors is a financial information service that seeks out inside information, that’s bad. If it’s a newspaper that does investigative reporting, that’s fine.

Second, I wrote yesterday about the line between journalism and insider trading, and I suggested that the line is probably some (fairly small) number of subscribers. If you find stuff out and email it to five hedge funds, that feels like you are a “consultant” and it’s insider trading. If you email it to 100 newsletter subscribers, 90 of whom are hedge funds, you’re probably okay. Not legal advice!

A reader pointed me to arguably the leading court case on the matter, involving Reorg Research.[b] This was not an insider trading case: Reorg Research Inc. is a “corporate intelligence company” covering bankruptcy and distressed debt, and it sent subscribers two alerts about Murray Energy Corp. Murray “suspected that the unnamed sources were some of its own investors who, the executives believed, had revealed the information despite having signed confidentiality agreements,” so it asked a judge to force Reorg to reveal its sources. Reorg said, no, we are journalists, and New York’s Shield Law protects us from having to reveal our sources. Many journalistic organizations, including Bloomberg LP, supported Reorg, and a New York appeals court agreed: Reorg was doing journalism. At the time, it had “about 375 subscribers who ‘manage trillions of dollars in assets’” and paid “between $30,000 and $120,000 a year” for subscriptions. So the line between journalism and insider trading is probably lower than 375 subscribers.

Finally, here is Dan Primack at Axios with more detail on Hunterbrook’s model, which involves global coverage, commodity and currency trading, and being very very careful not to do insider trading[c]:

If the story is too good, you can’t trade on it.

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1. To be clear, reputable journalists do not normally pay sources for scoops, and frown upon journalists who do. Hedge funds do sometimes pay for scoops. View in article

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2. There are, of course, many more, like “industrial espionage” or “file whistleblower complaints with the US Securities and Exchange Commission.” View in article

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3. I want to be clear that I am not making any claims about journalistic ethics here. I think some journalists would say that it is unethical, or at least frowned upon, to do some of the favor trading I discuss in my second paragraph. (And almost all journalists would say it is unethical to pay your sources in cash.) But I think most journalists would be okay with at least some of those things. It’s broadly acceptable to buy a source a drink. View in article

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4. Outside of the US, the law sometimes takes the view that the public doesn’t have a right to know stuff that companies want to keep secret, but the US is pretty pro-press. View in article

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5. As a technical matter, in US law, this situation is only illegal insider trading if the “tipper” — your source — received some “personal benefit” for giving you the information. If they told it to you out of pure public-spiritedness, you can go ahead and trade on it. But this rule annoys people, and it is applied pretty narrowly: Any minor personal benefit, career advice or favor trading or even the pleasure of giving a “gift” of inside information, can count as a personal benefit. In practice a source’s motives will almost always be mixed, and it will be hard for a defendant to win a case by arguing that the tipper got no personal benefit. View in article

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6. I think the leading case here is Blaszczak, about a “political consultant” who published research notes containing inside information to a small audience of hedge funds. (Fewer than five, I think, but more than one.) He was convicted of insider trading, though his conviction was reversed for other reasons. (Disclosure: My wife’s law firm represented a defendant in this case.) View in article

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7. Back in 2012, Felix Salmon proposed that the New York Times should sell access to its market-moving scoops to hedge funds. If you assume that the Times largely gets its scoops from sources who (1) give it material nonpublic information and (2) obtain at least an arguable personal benefit by leaking to the Times, then that seems *less* risky than this model, but still risky. Having an extra step — not “the Times traded on it” but rather “the Times gave it to a hedge fund” — creates some deniability; the source/tipper might have gotten a personal benefit, but she didn’t know that her tip would be used to *trade stock*. On the other hand, if she didn’t know that her tip would be used to trade stock, did the Times *misappropriate* it from her by selling it to a hedge fund before publishing it? Does the Times own the information, or does the source? These strike me as puzzling questions. But in the Hunterbrook/Watchdog case, if the whole funding model is “we trade on stuff before publication,” then presumably a source would know that they’re gonna trade. View in article

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8. Not always. In a February article about short sellers at the Atlantic, Evan Hughes wrote: “Block and his competitors have also used muckraking tactics that would be forbidden at most news organizations: undercover work, paid sources, covert recordings. They’ll spy on factories and trick security guards into revealing precious information. Block maintains that if you want the ugly truth, you can’t go in through the front door.” View in article

1. Slightly edited for brevity, clarity and also obfuscation.View in articles. View in article

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2. I actually wrote about it here.View in article” View in article

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3. As a guy who writes a column on the internet based mostly on public information, I am not sure I agree with Primack’s characterization of what constitutes a “journalistic endeavor,” but you know what he means.View in article  View in article

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