Remarks on the problem of short-sellers to the Society of American Business Editors and Writers (SABEW)
Gary Klott Memorial Ethics Symposium, Minneapolis, Minn. on April 30, 2006
Initially I thought this was a fairly thin subject: What’s the problem with accepting information from short-sellers? If the story’s solid and newsworthy, you run with it, right?
But I started thinking more about it and decided it was an inspired choice, so let me see what I can contribute.
Mine is the perspective of somebody who tries to teach professional ethics, and I’ll be honest and say that this isn’t the perspective I would’ve offered as a business journalist, back before I was a virgin.
Forgive me for being the academic, but my job is to make simple questions complex, just as yours is to make complex questions simple, so I’ll start by breaking this topic into two questions:
First: Are there unique ethical problems raised by the practice of soliciting or accepting information from short-sellers for business reporting?
So the first question is, is there something unique here?
The second question is one of generalized relevance: Does the use of short-sellers illuminate larger problems that are presented when journalists serve as willing conduits for information that, for whatever its public value, is intended to harm? Does that intent matter? And is using it still OK?
So the second question is what we might conclude about the wider, familiar, vexing issue of which shorts are a special case.
And I’m going to wind up with some comments about what I propose to call the Dilemma of the Evil but Truthful Source.
I. To the first question: Is there anything unique about the problem of short-sellers.
The answer here, I believe, is yes.
(Parenthetically, let’s assume for sake of discussion that the information the short-seller is tipping you to is accurate and apparently newsworthy, and is something you can verify for yourself. So you don’t have to take his/her word for it. I want to distinguish this from a host of problems associated with using confidential sources. In other words, technically, this is a tipster, not a source.)
What’s unique about the short-seller situation?
First, clarity of motive. The benefit that the source will derive from your use of the information is clear and undeniable. Oftentimes, motives are hard to infer when it comes to sources. Not with shorts. They are tipping you to information in hopes that they will make money as a direct consequence of your publishing it.
And, if benefits are clear, so too the harm is equally clear and undeniable. Their gain will be somebody else’s loss. The valuation of an asset is supposed to suffer. Your source is betting on a market plunge, in which people who aren’t plugged in will be screwed and the source will help scrape up the difference. I’ll come back to the counter-argument that the companies the shorts target often get no more than what’s coming to them. So the first element is clarity of motive.
Second, the entire play is short-term, and it takes place over a tightly confined period. A fuse is burning. In that respect, if you view your normal mode of activity as a business journalists to be in some sense comparable to that of value investors–looking to understand and analyze economic activity in terms of their fundamentals and long term realities–this is a time-bound ploy that is quite different.
Third, your collaboration is integral to the financial maneuver. Hence, you think you’re just writing a story, but you are getting the story only to buy your participation in a market-moving strategem. And I’m going to suggest that you can’t evaluate your choices unless you look at whether you’re OK with that strategem.
It is possible that the story you’re going to write will provoke needed reforms, and will trigger a market response that’s entirely appropriate (and newsworthy.) But that isn’t the reason you’ve been handed the story. It’s in the hope that your reporting will touch off a stampede, or will soften up the company in view of a possible takeover play you don’t even know about.
Your situation is very much like the short-seller’s. Both of you are looking at short-term benefit — for you, a story — from disclosures that will harm other people and may or may not have an offsetting beneficial effect. Neither of you is supposed to care about that long-term benefit.
So to wind up this uniqueness discussion, I’d say there’s a clarity and intelligibility to the problem posed by short-selling that’s a relief, compared with the lunacy of political sources.
II. Now to the second question: In what respects is short-selling emblematic of larger issues raised by listening to sources with damaging information and agendas of their own (as if there is any other kind)?
My point here will be that the shorts situation is an especially clear instance of a larger problem that journalists routinely face:
The Dilemma of the Evil but Truthful Source.
Some of you won’t like where I’m going here, but I’m going to conclude that if you knowingly and willingly accept a role in a ploy, a strategem, in exchange for information, you can’t evade a share of responsibility for the overall morality of that ploy by hiding behind something called professional obligation.
First, obviously, even though the source has motives of its own, the information may very well be solid and may indicate gross improprieties and wrongdoing that under any standard of newsworthiness or public service ought to be exposed.
In that respect, you take your shot. If you get tied up in meditations on ultimate consequence — which is unknowable — you’d never get out of bed in the morning. So run with it, and let the chips fall.
That’s easy. It’s the pure case when the existence of a private agenda seems clearly to be of lesser importance than the wider benefits that derive from publishing. So somebody settles a score, God bless. That unpleasant reality is outweighed by the importance of the news that gets out.
But what about when the public stake in the disclosure is less unequivocal? When you can’t be sure anybody apart from your informant and a small number of market players will benefit? Suppose this is juicy, personal stuff that will embarrass current management and feed doubts about its credibility, but will have bearing on the company only because you’ve reported it? (Stuff from divorce files that makes the CEO look like a jerk, e.g.)
All you know is that the market will react — isn’t that enough to make it newsworthy and reportable?
Here, it seems to me, you have a weaker line of defense: Serving the market. I’m sure we have a number of the faithful out there who believe the market is a powerful instrument of efficiency, democracy and justice. I came of age in a more skeptical time, but enough of that…. For you the market relies on a free flow of information. Even disclosures that seem cheap and harmful serve as lubricant; besides, they may be countered by other disclosures, and some rough balance is achieved:
“I’m just a reporter, and I don’t adjudicate rights and wrongs, let alone know what the ultimate effects of a story will be. It’s not my job. I serve the market system with accurate information.”
But is that just an occupational reflex — or does it reflect some larger morality that you’re pledging subservience to? Does it justify indifference to abundant evidence that you’re about to harm people?
In the case of short-sellers, I think it’s a beguiling argument, but a cop-out. Indeed, one danger here is that the notion of newsworthiness itself is trivialized and corrupted: If you decide that information is newsworthy because it will move the market, you are no longer making that judgment as a professional journalist, you’re making it as a proxy for a narrow class of market players. You’re no longer engaging the norms and values of the larger economic system.
What if there is information about the private doings of a CEO that his or her enemies will seize on? Is that a story for you too — simply because it’s likely to have a real-world impact, even though it invades privacy and causes personal harm and doesn’t really reflect on professional competency?
Yes, sometimes companies get what’s coming to them. That’s what you’ve got to look at. Because the shorts aren’t. They may still have a smart interesting story to sell that may drive down the share value of the company within the time frame that they need — without reflecting significant realities about the company or prompting reforms in the targeted firm.
I’d argue we’re not absolved from basic moral obligations just because we’re journalists. Role morality isn’t the last word.
(That’s right. You pull the kid out of the river, even if it means you don’t get to write the story about the tragic drowning.)
In fact, our own codes demand we refrain from doing unnecessary harm. As a journalist, I’ve always argued that you don’t keep newsworthy things from the public unless there’s a very good reason.
But I think journalists retain a wider and pre-professional obligation to scrutinize their conduct and understand their susceptibility to manipulation by special interests, who understand too well what we need to do our jobs.
The problem of the Evil but Truthful Source is not straightforward. Life would be simpler if our job was just to get the news and write the story. But when you’re knowingly enlisted in a financial strategy, you can’t pretend your role is limited to writing a story that just happens to advance that strategy. This is not comfortable to say, but you need to decide whether you want to serve its ends.
And falling back on your duty as a journalist doesn’t relieve you of that responsibility.