Felix Salmon

Dennis Berman’s ethics

By Felix Salmon
April 18, 2011

Last week, Ira Stoll took issue with Dennis Berman’s column on SharesPost and SecondMarket, on the grounds that Berman lied about his own identity: he pretended to be his late grandmother. Stoll likened Berman’s behavior to Project Veritas’s entrapment of NPR — something the WSJ itself said failed to “meet the ethical standards of elite journalistic institutions, including of course The Wall Street Journal”.

Now SharesPost CEO Dave Weir has written his own take on the Berman column, and it goes much further than attacking Berman for lying about his identity. He also accused Berman of misrepresenting SharesPost’s policies, “leaving readers largely misinformed and our company unfairly maligned”.

I asked Berman if he had any response to Weir, and he replied by sending me a copy of his response to Stoll:

As you can appreciate, the integrity of these markets is based in part on honest disclosures by both buyers and sellers. My intent was to probe the strengths and weaknesses of a system that relies almost exclusively on buyers’ own disclosures for establishing whether they are “accredited.” That self-reporting standard enabled my grandmother to slip through. So might other people with intent to dodge the rules.

My approach and objectives were discussed in detail with the companies prior to publication. As you can see, the story also praises SharesPost for cutting off my access.

We take ethics and fairness very seriously at the Journal. We are in the business of truth-telling, not deception. In this case, applying a simple test to an entire way of doing business helped shed light on an important topic for investors and markets that ultimately serves the public good.

Weir was well aware of this response when he wrote his email, and aware too that it doesn’t come close to answering his substantive criticisms. In fact, Berman’s response to Stoll only serves to exacerbate the misinformation in his original column, since he says that the SharesPost system “relies almost exclusively on buyers’ own disclosures”. This simply isn’t true, as Weir explains:

-Mr. Berman failed to mention that his fraud only enabled him to view information on our site. Had he attempted to transact, he would have been required to undergo a second level of compliance review and direct dialogue with one of SharesPost’s FINRA registered brokers;

-Had he actually entered into agreements with a seller, those agreements would have required him to make multiple contractual representations to the seller, the company and SharesPost that he had provided accurate information and was in fact an Accredited Investor;

-Had he actually entered into a contract to purchase shares, the transaction would have been processed by U.S. Bank, a third party escrow agent, which first verifies buyers’ and sellers’ identities by collecting all the documents required under the Patriot Act and Anti-Money Laundering regulations.

Berman’s response is barely adequate as a reply to Stoll. There are many legitimate concerns about SharesPost, but the fear that people are lying about their identity to trade shares on the system is not one of them. Berman gives no reason to believe that has ever happened, or that anybody is silly enough to even attempt it: after all, no one wants to end up running the risk of having valuable shares taken away from them on the grounds that they were acquired under false pretenses.

The rest of Berman’s response is even weirder. Whether Berman subsequently talked to the companies under his own name is beside the point — and if the WSJ is “in the business of truth-telling, not deception”, why did Berman lie and deceive? His only defense is that doing so “ultimately serves the public good”. And that defense, as we’ll see, doesn’t stand up.

If Berman’s statement is weak as a response to Stoll, it’s clearly inadequate as a reply to Weir. If Berman’s intent was “to probe the strengths and weaknesses” of the SharesPost system, as he says, then why didn’t he mention any of the strengths of the system, which would clearly have prevented his late grandmother from buying shares?

And more generally, if Berman’s “in the business of truth-telling”, then why did he end up publishing a column which, as Weir says, “ignored and embellished the facts to suit his story line”?

There are lots of errors in Berman’s column, starting with its headline: “Meet My Departed Grandma, Fledgling Facebook Investor”. This is false: Berman’s grandmother failed utterly to invest in Facebook.

Berman goes on to say that his grandmother was “cleared” to buy Facebook shares, and that SharesPost certified her as an accredited investor. But as Berman himself admits later on in the column, in the first instance buyers certify their own credentials; the minute that the process reached the point at which SharesPost had to do any clearing or certifying, the company suspended the account.

Berman then says that trading on SharesPost is “especially prone to insiders’ whims”. It’s unclear what the literal meaning of that phrase is meant to be, but the message is crystal-clear: SharesPost is a Wild West haven for insider trading.

In case you missed the message the first time, Berman goes on to add that the SEC “is investigating potential abuses in these secondary markets, including conflicts of interest and insider trading” — a statement which as far as I can tell simply isn’t true. There was a story back in February about the SEC looking at “potential conflicts of interest” at SharesPost and SecondMarket, but there was nothing in it about insider trading. Berman’s assertion, which comes without any sourcing, is dangerous precisely because it’s unfalsifiable. But if he did have good sources, you’d think that he’d lead with the SEC’s insider-trading investigation, rather than with his dead grandmother.

In between musings about insider trading, Berman declares that on SharesPost, “prices can swing on just a few trades” — but again it’s unclear what he means exactly. Does he mean that SharesPost has seen wild price swings? I doubt it, since he doesn’t give a single example. He probably just means that in theory there can be big price swings — but that’s true of any market. Again, the real meaning is clear, even if the literal meaning isn’t. Berman’s saying that prices on SharesPost are particularly volatile. Is that true? Again, he doesn’t give us any reason to believe that it is. Instead, he looks at a wide bid-offer spread for eHarmony shares, which just says that the market in eHarmony shares isn’t clearing — and you can’t have price volatility in a non-clearing market.

What else? For one thing, Berman says that SharesPost and SecondMarket “give young companies and their employees new ways to raise capital” — simply not true. No company has raised capital on either platform.

He also says that “players in these companies’ shares couldn’t care less about the intricacies of market regulation”. Which is self-evidently not true: if you’re buying shares in these companies, you care deeply about who you’re going to be allowed to sell the shares to, and how, and when.

And he massively misrepresents how close he and his dead grandma managed to get to actually playing in this market:

A few have made small fortunes, cleverly snapping up shares of companies like Facebook and Groupon and riding into the sunset. Last week Grandma and I joined their ranks, spending a few days loitering, testing and playing in these private markets.

If I were to test a market, I’d test it by making some small trades to see how they went. That’s obviously not what Berman did, though: he never got anywhere near being allowed to make trades. So what he means by “testing” the markets is far from clear. As is what he means by “these private markets” plural, when in fact he only signed up for one market — SharesPost.

Berman even contrives to quote Ben Horowitz saying that he “expects these marketplaces to founder”, without mentioning Horowitz’s massive conflicts: Horowitz’s fund is a high-profile alternative option for investors wanting to get access to private equity, and indeed Horowitz bought a significant $80 million stake in Twitter on the secondary markets himself.

And as I said when Berman’s piece came out, his claim that “investors need to be comfortable that they can trade at will” manages to completely miss the point of these markets.

Most amazingly of all, Berman manages to miss all the good, real reasons to mistrust these markets while he’s busy spinning his silly yarn about the connection between his dead grandmother and insider traders. Quoting Ben Horowitz but not Tim Geithner — that’s just plain weird.

All of which makes me very sympathetic to Weir, who says reasonably enough that “the Wall Street Journal can and should do better”. Is what Berman did unethical? Yes — if you’re going to lie in the service of reporting a story, you need to be able to get information that way which you couldn’t get through normal reporting channels. It’s no great secret or revelation that people can put whatever information they like into a web form, and then start lurking in SharesPost forums, calculating bid-offer spreads and reading investors’ whines about not being able to buy into Groupon.

If Berman’s late grandmother had actually been allowed to buy shares, that would have been a serious security breach. But she wasn’t. So the ends don’t remotely justify the means here.

And this wasn’t some kind of deep investigation on the part of Berman: rather, it was a cheap stunt, designed to confirm Berman’s pre-existing prejudices. Something which can be justified in the former case can still be a very bad idea in the latter.

To make matters worse still, Berman isn’t some kind of overenthusiastic kid reporter who stepped a bit too far. He’s the deputy bureau chief for Money & Investing, helping to shape large chunks of the WSJ’s finance coverage. What he does is a clear signal to everybody who works for him about what is and isn’t acceptable in WSJ reporting. Unless, of course, he makes it clear that he has lower standards for his own work than he does for the work which he edits.

3 comments so far | RSS Comments RSS

All of this is very interesting, but it doesn’t change the fact that Dennis ran a great paper in college with the best gossip column ever. Go Dennis!

Posted by Dopeman | Report as abusive

I realize this comment is a bit dated relative to the column, but the real risk in these markets is the terrible information asymmetry. Yes, they are “sophisticated” investors, but oftentimes, they are only hearing the carefully selected marketing talking points being distributed. The app/soc network companies have an interest in misleading the market about their user activity; it’s a core promotional capability to get people to join. In order to actually verify active user count, retention, activity, you need to be on the other side of the curtain. There is no Comscore, etc., for apps and app activity. For some of these free apps, the stated user counts should be discounted by 95+% to only count active users. An investor paying, say, $300 per registered user might actually be paying $3000+ per active one.

Posted by Derrida | Report as abusive

Dennis Berman hit the nail on the head. These secondary markets are relatively unregulated yet currently have disproportionate influence on potential primary market offerings. Without transparency there is the opportunity for manipulation and for investors to be hurt. Kudos Berman!

Posted by ExtraCare | Report as abusive

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