Could the NYT make money from its scoops?

By Felix Salmon
April 24, 2012
exposé this weekend is that it was such a surprise to the market.

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Perhaps the most surprising thing about the NYT’s Walmart exposé this weekend is that it was such a surprise to the market. Note this, for instance:

In December, after learning of The Times’s reporting in Mexico, Wal-Mart informed the Justice Department that it had begun an internal investigation into possible violations of the Foreign Corrupt Practices Act, a federal law that makes it a crime for American corporations and their subsidiaries to bribe foreign officials. Wal-Mart said the company had learned of possible problems with how it obtained permits, but stressed that the issues were limited to “discrete” cases.

“We do not believe that these matters will have a material adverse effect on our business,” the company said in a filing with the Securities and Exchange Commission.

The filing in question was Walmart’s quarterly report, which was filed with the SEC on December 8. These things take a significant amount of time to put together; it’s reasonable to assume that Walmart has known about this NYT investigation, then, for a full five months at this point. And while the story carries the sole byline of David Barstow, it was reported with the help of James McKinley in Mexico City, as well as the fabulously-named Alejandra Xanic von Bertrab. The newspaper was surely extremely assiduous in its reporting and fact-checking; I’m sure that there was an extremely large number of sources who had some inkling of what was being reported.

And yet the market was taken by surprise, with $12 billion of market capitalization evaporating from Walmart and Walmex in one day.

Which raises the obvious question: shouldn’t the NYT, which can always use a bit of extra revenue, take advantage of the fact that its stories can move markets so much? Not directly: I’m not suggesting that the New York Times Company should start buying out-of-the-money put options on Mexican corporates in advance of its own stories. But how much would hedge funds pay to be able to see the NYT’s big investigative stories during the trading day prior to the appearance of the story? It’s entirely normal, and perfectly ethical, for news organizations, including Reuters, to give faster access to the best-paying customers.

What’s more, good journalism is increasingly being done by people who unabashedly have skin in the game. The Muddy Waters report on Sino Forest, for instance, was explicitly written by someone with a big short position in the company. And today Anonymous Analytics, a forensic-accountancy spin-off of the hacker group, has released a detailed report on Huabao International which is similarly likely to cause a substantial fall in its share price. They write:

Anonymous Analytics holds no direct or indirect interest or position in any of the securities profiled in this report. However, you should assume that certain contributors to this report, as well as their members, partners, affiliates, colleagues, employees, consultants, muppets clients and investors, as well as our clients have a short position in the stock of Huabao International Holdings Limited (HK: 336, “Huabao” or the “Company”) and/or options of the stock, and therefore stand to gain substantially in the event that the price of the stock declines.

It’s a good report, well worth a read for connoisseurs of short-seller research. My favorite bit is where they flew to Botswana to try to find out what on earth the Huabao operation there was up to, tracking down the plant despite the fact that the company had photoshopped its photograph to make it impossible to work out where it was. This is a kind of long-form journalism, and it can be extremely remunerative. If the NYT is working on similar stories, why not take advantage of that fact and allow other people to make money off what you’re doing anyway?

The reporters and even the editors on any given story need never have any connection with any hedge fund or corporate client. All that’s needed is that when a big story is entering the final stages of layout and fact-checking, a version is sent under strict embargo to a client or clients who have paid for that access. They can then act on the story in the markets.

The main potential problem I see here is that if such an arrangement were in place, corporate whistleblowers might be risking prosecution as insider traders. But I’m sure the lawyers could work that one out. The church-lady types would I’m sure faint with horror. But if hedge funds are willing to pay the NYT large sums of money to be able to get a glimpse of stories before they’re made fully public, what fiduciary could simply turn such hedge funds away?

32 comments

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You might want to check the Wikipedia entry for R Foster Winans before asserting confidently that there is nothing illegal or unethical about a major newspaper selectively disseminating its forthcoming stories in return for money. Have a word with a lawyer at Reuters about how complicated this issue is. I would be very surprised indeed if Reuters gives hedge funds a day’s advance notice of major stories; I would be quite surprised if it gives ten seconds advance on the non farm payrolls.

The point here is that “this story is going to appear in the New York Times” is itself material nonpublic information; as a trusted source of news with three million readers, the NYT is not in the same position as a short-seller’s scandal sheet. So no, you can’t do this; any hedge fund with a brain and a compliance officer would run a mile at the suggestion.

Posted by dsquared | Report as abusive

DSquared – are you sure?

Winans was violating the terms of his employment by trading on his inside knowledge of the WSJ’s content – though in fairness to him, he did write that content. But still, he was forbidden by the paper to do what he did.

I don’t see why the entity itself can’t use the information it lawfully discovered through its own “skill, foresight and industry” to make investment decisions, the same as any other entity could. If it did so, it would probably be a good idea to mention that in the article when it is published.

Doing so would cause people the view the Times differently than they do now. Perhaps that’s a price worth paying – print media seems destined for the scrap-heap unless they do something dramatic.

Posted by MrRFox | Report as abusive

Yes I’m pretty sure. Winans was convicted for both fraud (stealing the information which was held to be the property of his lawyer) and for insider trading, the second of which didn’t depend on him having violated the terms of his employment. The insider trading conviction was controversial at the time, but rules have been tightened up a lot more since the 1980s. I would *guess* that the NYT itself could win a case on First Amendment grounds, but the financial counterparty would have to demonstrate compliance with securities regulations as well as the criminal law.

I also disagree with Felix as to whether it’s unethical. It really doesn’t seem to me to be part of the New York Times’ implicit contract with its readers to start letting a few hedge funds know what’s going to be on the front page.

Posted by dsquared | Report as abusive

Not to mention that the Times would then have conflicted interests: a story might be, or might be seen to have been, undertaken for the primary purpose of manipulating the market. Really, The Times’ only competitive advantage is its credibility — not worth jeopardizing for a few measly billions.

Reuters, of course, though it has evolved into something approximating a public utility, began life as exactly what you propose for The Times — a way for traders to beat the market. Perhaps your corporate DNA is showing….

Posted by acebros | Report as abusive

It’s an interesting idea, and the money-minded side of me is tempted.

I just worry about the incentives created. It seems to me it wouldn’t be too long before the newspaper industry would be engaging in practices akin to extortion. Imagine the ramifications if newspapers did indeed embellish their stories. Asymmetric information gone wild.

Posted by Woberz | Report as abusive

Brother Ace nails it when he points out that trading by the NYT would create a sort of a conflict of interest situation, though not exactly that. Media players now present themselves as objective, disinterested observers of fact. If a media company starts trading for its own book ahead of publication it has become “an interested party”. That’s not actually wrongful, though it is different. It properly should be disclosed.

Selling of the info ahead of publication to enable others to front-run the story – creepy.

Publishing fake stuff for purposes of manipulation – fraudulent, libelous and criminal.

Posted by MrRFox | Report as abusive

dsquared, I disagree that the insider trading count for Winans “didn’t depend on him having violated the terms of his employment.” That is the exact and only thing on which it depended. As the 2nd Circuit (which wrote the controlling opinion affirmed by an evenly divided Supreme Court) wrote:

“This case requires us to decide principally whether a newspaper reporter, a former newspaper clerk, and a stockbroker, acting in concert, criminally violated or conspired to violate or aided and abetted in the violation of federal securities laws ***by misappropriating*** material, nonpublic information in the form of the timing and content of the Wall Street Journal’s confidential schedule of columns of acknowledged influence in the securities market, ***in contravention of the established policy of the newspaper***, for their own profit in connection with the purchase and sale of securities.”

If the Times had Felix’s scheme as an announced policy it sounds to me like it would be kosher, exactly as Muddy Waters’s short-then-publish business model is kosher.

The Second Circuit has a good summary of the law, which depends absolutely on violating the terms of something – the term is “misappropriation” or “violating a duty of confidence.” http://law.justia.com/cases/federal/appe llate-courts/F2/791/1024/333074/

The Supreme Court’s less useful opinion is here http://caselaw.lp.findlaw.com/cgi-bin/ge tcase.pl?court=us&vol=484&invol=19

Posted by MattL | Report as abusive

Felix, I am afraid you are a bit off track here but I’ll give you a clue – think about the large shareholders of NYT – think once, think twice, think Mexico….

Posted by Tseko | Report as abusive

And what about the retail investor? And out of whose pockets would the profits from this sort of maneuver come from? At some point, people are going to realize that this sort of stuff increases risks, and consequently costs, for the ordinary, prudent 401(k) investor. And I doubt, btw, that it would be a such great deal for the NYT, given that the NYT’s assets are mainly reputational.

Posted by MattF | Report as abusive

This feels like deja vu and I must blow my own trumpet:

http://buzzmachine.com/2009/05/20/the-jo urnalism-bubble/ (comment number 5)

I used to run Reuters Labs, and some of our more controversial ideas, that we couldn’t touch for obvious reasons, involved comcepts like auctioning un-broken news stories to the highest bidder. Just imaging if Wal-mart could have paid NYTimes to NOT report…

Posted by nicfulton | Report as abusive

@MattL – thanks for that excellent summary of the case and the cites.

“Just imaging if Wal-mart could have paid NYTimes to NOT report…” (NicFulton)

Don’t think so. That kind of thing goes by the names “witness tampering” and “obstruction of justice” and conspiracy – as this is apparently a criminal matter.

@MattF – Try to see that the damage is going to happen to the shareholders whether or not the NYT trades. The only way to prevent that would be to prevent the Times or anyone else from ever disclosing the matter – can’t count on that.

Posted by MrRFox | Report as abusive

Felix, I know print journalism is under severe pressure to find new sources of revenue, but I’m afraid you’ve gone a bit off the rails here.

Put aside d-squared’s valid points about whether appearance in the NY Times itself constitutes material inside information, and trading on it would therefore be prosecutable as insider trading. I happen to agree with him, but never mind.

My objection is why in God’s name would you want to give the reporters and editors of the New York Times even more of an incentive to break market-moving news. Surely you know there are many sides to any story; emphasis is critical. Why would news consumers trust editors and journalists who could directly profit by making a complicated story just a little more controversial, by shading facts and presentation to put a company in a worse light, by selectively releasing (or suppressing) information? Newspapers like the Times have always relied on a not quite accurate but nevertheless crucial image of impartiality for their authority. This would disappear if they were seen to be tools of Steve Cohen or Ken Griffin.

News media already have a credibility problem. This loony idea would obliterate whatever they have left.

Posted by EpicureanDeal | Report as abusive

MattL – actually I think you might be right about the Winans case – US insider dealing law is funny in requiring a breach of fiduciary duty. So as long as the NYT only did this with stories about US issuers and only accepted money from US-only hedge funds … it *might*, just possibly, avoid breaking the law. But even then, I think it might be caught by rules on selective disclosure – if the NYT were to start selling market-moving information about traded securities, then it is not clear to me that the SEC wouldn’t consider it to have left the newspaper business and gone into the regulated investment advice business.

The best way to think about this is to consider S&P or Moody’s. Notoriously, from the point of view of US law and regulation, they are no different from newspapers – their ratings are protected First Amendment speech and they are not considered to be giving investment advice (weird, I know, but that’s the law).

So would it be OK for Moody’s to sell hedge funds a day’s head start on rating changes? I think we can all see that it wouldn’t.

Posted by dsquared | Report as abusive

@DSquared – what about Moody’s trading on its own account – legal?

Posted by MrRFox | Report as abusive

On a practical note, I think Felix might have substantially overestimated the amount that hedge funds pay for research, or underestimated the costs of securities litigation. Since it is unlikely that anyone is going to indemnify the NYT’s legal costs, I would guess that even one really nasty case where a story didn’t quite check out and an issuer (or the SEC) sued, could wipe out five years’ revenues from these sales.

Posted by dsquared | Report as abusive

It’s entirely normal, and perfectly ethical, for news organizations, including Reuters, to give faster access to the best-paying customers.

Posted by upstater | Report as abusive

” I would guess that even one really nasty case where a story didn’t quite check out and an issuer (or the SEC) sued, could wipe out five years’ revenues from these sales.” (DSquared)

They get that whether they trade or not.

“It’s entirely normal, and perfectly ethical, for news organizations, including Reuters, to give faster access to the best-paying customers.” (UpStater)

Perhaps, but its creepy to get mixed-up in any sort of exclusionary, conspiracy-like, trading thing. Trading on the firms own dime is one thing – selling the info to a select few is something else. Besides, why would they care to? – acting on the info is better from every angle than selling it, IMO.

Posted by MrRFox | Report as abusive

Can someone call a securities lawyer?

Generally, insider trading requires MNPI (material non-public information), and MNPI requires that the leaker breached his duty to not act on that information.

That duty can be created by virtue of employment at the subject company (CFO front running earnings), by employment at a company that pays you to acquire information but forbids you to trade on it (analyst, employee at print shop that’s printing an annual report or BusinessWeek), or a reporter at the NYT if the NYT forbids employees from so trading.

It DOES NOT create a duty to not disclose on the NYT itself, if the NYT is the entity that gathered the information, and it doesn’t forbid itself from trading on or disclosing the information it gathered.

Can an investigative reporter working for herself trade on her findings? Of course.

Can the NYT Inc. trade on its lawful reporting? Of course.

Can a NYT reporter trade on her reporting if her employer forbids it? No, that is breaching her duty to the NYT Inc. and she misappropriated MNPI from her employer.

Posted by SteveHamlin | Report as abusive

“They get that whether they trade or not.”

I don’t think they do. If they’re just a newspaper, the only hook an issuer has into them is the common law of libel and they have considerable First Amendment defences. If they’re involved in securities business, then there is a much more arguable case for suing them for securities fraud, pump-and-dump etc, and business speech has a lot less protection. The legal risk is surely massively magnified.

Posted by dsquared | Report as abusive

Felix, please – first you have to be elected to Congress. Then your staff can do this whenever they want. Don’t you understand the rules?

And bonus points for putting this question right before the Is-Wal_mart’s-Ethics-Policy-too-Strict? post.

Posted by Dollared | Report as abusive

I always thought everybody had exactly the same 1st Amendment rights. Must have missed something in school.

Posted by MrRFox | Report as abusive

and MNPI requires that the leaker breached his duty to not act on that information

Only in the USA. The NYT is an international newspaper which writes about international issuers. So, if for example it has a great story about Punch Taverns plc, and phones up Greenlight Capital asking if they’d like a look at it, I would imagine that given his recent experience Mr Einhorn might give a salty response.

Can the NYT Inc. trade on its lawful reporting? Of course

… but if it does so, it is not at all clear that NYT Inc can still claim that the story it publishes is simply news reporting and subject to the full protection of the First Amendment. If the story has to be stood up as business speech and is susceptible to securities litigation, it might be a much bigger risk. Also, the New York Times doesn’t create its scoop stories from thin air and it doesn’t, for the most part, use only publicly available filings. In order to have a product that it could either trade on itself or sell to a hedge fund, it would need to be able to prove that none of its reporters had talked to sources who had a fiduciary duty.

Mark Cuban did actually try to launch an investigative website based on exactly this model and it hasn’t really gone anywhere.

Posted by dsquared | Report as abusive

No mention of Mark Cuban’s ShareSleuth? :)

Posted by johncabell | Report as abusive

Regarding huabao international, I knew I had seen this name before. Some of the evidence presented in the summary has similar analysis.

http://brontecapital.blogspot.ca/2011/10  /ladies-in-elegant-high-heels-water-at. html

Posted by Bdylan | Report as abusive

Dquared makes some great points. I think that selling early access to newspaper stories in the manner proposed by Felix has a lot of similarities to trading based on information from expert networks, which clearly generated prosecutions. The experts used by those groups are awfully similar to the sorts of sources used by newspaper reporters – current or former employees who have a duty to their employer and probably have a a mix of information that’s OK under insider trading law plus material nonpublic information. In this one, think of grey areas like calling up a sample of Applebee’s store managers to ask how business is going. Then there are people at 3rd-parties probably without a duty to the subject company, such as relying on customers and suppliers for channel checks. At a minimum, I see the idea of reports shielding the identity of sources going out the window once the SEC gets involved.

MrRFox, as to whether everyone has the same First Amendment rights, my short answer is that not everyone does once they get near the public markets as securities owners or issuers. Matt Levine at Dealbreaker wrote about a case that is definitely not an exact analog to Felix’s proposal, but illustrates the point that, First Amendment or not, saying that a statement is true isn’t always a defense under securities law -

http://dealbreaker.com/2012/03/investmen t-manager-stands-up-for-truth-and-the-am erican-way/

Posted by realist50 | Report as abusive

“Dsquared”, not “Dquared”

I’ll also add that the typical deal scoop story – “Company X to buy Company Y” according to “people familiar with the matter” would be a textbook example of insider trading on material non public information if anyone did so, as the “people familiar with the matter” are almost certainly executives, bankers, or lawyers with a duty not to disclose the information.

That thought leads to another interesting point. Reporters almost always call a company in Wal-Mart’s shoes to ask for a comment. Frequently the answer is “no comment”. If, however, senior management of the company does provide meaningful comment that influences the story, isn’t that enough to prevent sale of early access to the story since that’s arguably material non-public information?

Posted by realist50 | Report as abusive

“If, however, senior management of the company does provide meaningful comment that influences the story, isn’t that enough to prevent sale of early access to the story since that’s arguably material non-public information?”

Potentially yes – in fact, the whole media safe-harbour under regulation FD for disclosures of non-public information is pretty dependent on the media outlet then not selectively disclosing it itself.

But it goes even further than that. You can’t assume that “the NYT’s story” is purely the property of the NYT for purposes of insider dealing regs. If the investigative reporter has talked to even one employee or fiduciary of the company, then that information is potentially misappropriated and the story therefore becomes material nonpublic information even for purposes of US law.

Felix says above that this practice would make corporate whistleblowers into insider dealers and says “I’m sure the lawyers could sort that out”. Well no; I’m sure that they couldn’t; selective “whistleblowing” to short sellers is not protected at all. It really, really isn’t in keeping with the spirit of the relevant securities laws to provide a means whereby inside information can be used by hedge funds to make a profit. Even if that would be a useful revenue stream for the New York Times.

Posted by dsquared | Report as abusive

While the insider or early trading aspects are definitely a possibility (and have been well dissected in the comments above), the opportunity to monetize scoops via stand-alone “journalism” or “news” products may actually be one of the best ideas yet.

Posted by C.Rechtsteiner | Report as abusive

Yes, the “insider-trading” issue has been much discussed, but it is at best tangential to the thrust of Felix’ story, which is (as I take it), can and should the Times sell early access to market-moving stories? This is precisely what Julius Reuter did when he sent fast boats to meet the steamers off Ireland before the transatlantic cable was laid — the foundation of the Reuters empire. But Reuter was running a PRIVATE news service.

The Times could do it, and, for all I know, The Times should do it, but that would put a clear end to The Newspaper of Record.

Perhaps The Newspaper of Record is already only an old-fart memory anyway — it’s certainly much diminished, in both quality and volume — maybe this is how the Sulzbergers and Goldens should get the last juice from the husk. Sad…and yet, Time hath his revolutions; there must be a period and an end to all things temporal ~ finis rerum ~ an end of names and dignities and whatsoever is terrene, and why not of Ochs? Where is Hay Whitney? Where is Chandler? and so on….

Posted by acebros | Report as abusive

“… what do you guys think about the items on that website?” (some spam artist)

I think this website would be a lot better without any of your items posted on it.

Posted by MrRFox | Report as abusive

I’m reminded of this NYT story about the BusinessWeek/Bloomberg integration:

===

One speaker was the head of Bloomberg’s “speed desk,” who was especially proud, according to people at the meeting, when the desk published a headline seconds ahead of Reuters, and a young trader had made enough money from that lead alone to buy a Hummer.

A Businessweek employee raised her hand. Why, she asked, would a journalist be proud of that?

At Bloomberg News, where writers’ salaries are tied, among other factors, to how many “market-moving” articles they have produced, Businessweek is fitting in like — well, like an 80-year-old print magazine in a company that is all about terminals.

===

http://www.nytimes.com/2010/04/26/busine ss/media/26bizweek.html

Posted by philgomes | Report as abusive

I love the way you initiate the discussion. I live in Mexico and from many sources I have heard many corruption acts from Walmart and other companies such as America Movil. Having or not the information beforehand wouldn’t change their ethics…

Posted by partner.analyst | Report as abusive