The Unethics Of Short-Selling Journalism

While we were surfing our favorite various news, gossip and blog sites today, we came across a lengthy piece in New York Magazine on our old Yale classmate Jim Chanos (we called him "Doc" in those days), who has made a killing managing a "hedge" fund that shorts stocks.

See "How Short-Seller Jim Chanos Is Profiting From The Suffering Stock Market."

It was an interesting profile. We especially liked the claim that Chanos "disdains Wall Street's elite culture." Sheesh--Chanos reportedly made $300 million last year, has a huge house on the beach in the Hamptons, has sued his neighbor there over a dispute about a beach path, and recently closed on a "$20 million triplex on 75th Street near 5th Avenue." Yeah, he's the common man all right.

Anyway, we digress.

One of the points in the article is that Chanos cultivates financial journalists, who can help him by penning negative stories about the companies his fund has shorted. Those negative stories, in turn, help drive the stock price of those companies down, ensuring that Chanos and his investors make money.

Now, Chanos will say he's just feeding the truth to those journalists, exposing companies with weak, or even fraudulent, balance sheets.

That's fine--we have no problem with that. What we do have a problem with is the absence of disclosure by the journalists. (The magazine story points out that many of those journalists have also gone on to land lucrative publishing deals for "exposing" the troubled companies.)

Journalists are loathe to name their sources. First Amendment and all that. But truth be known, they're more reluctant to disclose their sources because us, the readers, would be shocked at how unreliable, despiccable, self-serving, and double-dealing most of these anonymous sources are.

Anyway, they don't need to say "according to Jim Chanos . . ." But what they SHOULD say is that "one of the sources for this story is an investment fund manager who has taken a significant short position on company X and thus stands to make a lot of money if company X's stock goes down." After all, when the journalist gives--as they always do--Company X's side of the story, they don't do it anonymously. Instead, they say, "a spokesperson for Company X disputed these [anonymous] claims . . ." The reader, of course, then figures, "well, of course they dispute it."

When we were practicing law, we frequently ran into the same kind of Bermuda triangle of anonymous allegations in product liability cases. Plaintiffs' attorneys going after this drug, or that chemical, would tip off reporters, selectively giving them snippets of documents and depositions in the hope of getting a story that would provide adverse publicity to the product. Such negative stories generate more claims, put public pressure on the product manufacturer to settle, and inflate the value of such settlements.

Again, we're not against such stories--First Amendment, yada, yada. But, the reader ought to know that the story is based on information from an attorney who has a personal stake in the outcome and who, of course, is quite biased. (In many product liability suits, the plaintiff's attorney ends up with more than half the award--40% as a "contingency fee," plus all the trial costs.)

[And yes, it can work both ways. The Curmudgeon was not against using a friendly journalist to plant a favorable story.]

Let's face it, readers would be a tad more skeptical if they read a story like this: "Today, a group of lawyers who hope to make at least $10 million off pending litigation, alleged that X Pharmaceutical's new anti-nose hair drug causes depression, headaches, grouchiness, PMS and bloating in women under age 45 who've been treated with the drug."

An amazing amount of what we read in the papers these days comes from either someone with an axe to grind, or someone who expects to make money off the publicity. Real journalistic ethics--something that doesn't exist--would disclose these conflicts of interest, even if names were not named. (Note how quick the press is to jump on anyone else who fails to disclose a conflict.)

Don't expect things to change. Anyone who makes $300 million shorting the market is no more a hero than the folks who made that kind of obscene money leading investors into the financial mess we're in today.

Now, if only we could figure out how to make money with this darn blog!