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?