The verdict is still out on R. Foster Winans, the Wall Street Journalist who gave stock tips to his friends before he wrote his stories for the paper, but one fact has already been made clear by Winans' trial in New York.
R. Foster Winans is not a crook.
That can be said with the same certainty -- and the same smirk -- with which it was said of Richard Nixon.
That he is not a crook may be the best thing you can say about an employe who conned his company, a newspaperman who sold out his profession, a journalist who betrayed his readers.
Even if he has done all those things, however, Winans is not a crook -- at least not the kind of crook the Securities and Exchange Commission has accused him of being.
What the authorities have on Winans was clear even before his trial began last week. He has admitted that while dispensing stock market tips as author of The Journal's "Heard on The Street" column, he sometimes told friends what he was going to write about, enabling them to get a jump on ordinary readers and make money in the market. Winans' tips made almost $1 million for a few friends and earned him at least $30,000 -- almost a year's pay for him.
The SEC and the U.S. attorney's office in New York say that amounts to insider trading -- a violation of the law that prohibits corporate insiders from using confidential information not available to other investors. They contend that by his actions, Winans violated his legal obligations to stockholders of Dow Jones, the publisher of The Wall Street Journal.
The charge against Winans appears to go far beyond any previous interpretation of the law. The Winans case is the latest attempt by federal prosecutors to stretch the law against insider trading -- which is the number one enforcement priority of the SEC.
The courts in the past have found the law to be somewhat less elastic than the SEC has claimed. This case is more likely to redemonstrate the limits of the law than testify to its expansiveness.
No one before has ever been convicted of insider trading under these circumstances, which is why a lot of people are betting on Winans, much as they detest him.
Winans-bashing creates a scapegoat that saves authorities from having to question the role of Dow Jones & Co., the nation's most prestigious business publisher. Winans' prosecution implicitly exhonerates the system that fostered his foul play.
Even before the Winans case, there were hints that neither The Wall Street Journal nor Dow Jones exercised the kind of quality control that would be expected of a company ranked first for the quality of its products by readers of Fortune magazine. Dow Jones has espoused the highest standards of integrity to protect its readers from rogue reporters, but its record in enforcing those standards is not so impressive.
The Wall Street Journal says it has an ironclad conflict-of-interest rule that prohibits reporters from investing in companies they write about; reporters and editors are supposed to sign a form acknowledging the rules and agreeing to live by them. But on the second day of Winans' trial, a Journal editor said there was no evidence in the paper's files that Winans had ever signed the conflict-of-interest form, apparently because no one ever asked him to. So much for ironclad policies.
Nor does Dow Jones take the step that most other major newspapers consider necessary to enforce conflict-of-interest standards. At The Washington Post -- and most of its peers -- business reporters not only are forbidden to invest in companies they write about, but also are required to disclose their financial holdings to their boss. The disclosure is not made public, but when editors know the financial affairs of their staff members, they can steer them away from potential conflicts of interest. And they can use the disclosure forms to discipline those who lie about their investments or commit conflicts.
In the wake of the Winans affair, a number of papers -- including this one -- have extended and tightened their disclosure rules, but Dow Jones continues to insist that disclosure is unnecessary.
Winans is neither the first nor last reporter to embarrass Dow Jones with potential conflicts of interest.
A lawsuit filed against Dow Jones in federal court in Alexandria not long ago raised questions about what looked like advance tips on stories in Barron's, the investment weekly published by Dow Jones. On two occasions, the lawsuit alleged, a stockbroker who handles the personal investments of Barron's editor Alan Abelson made profitable investment decisions that coincided with articles in Barron's. The complicated lawsuit was dismissed on other grounds without any legal ruling on the conflict-of-interest allegation.
In both incidents, Abelson's friend the broker sold short stock in a Florida company called Safecard Services Inc. just before Barron's wrote bad things about the company. The broker made a profit when the price of the stock fell.
The editor and the broker testified they lunched together three or four times a month, but said they never discussed Safecard. It was just a coincidence, the two said in depositions, that a few days after they had lunch, the broker sold the stock short and soon after that, Barron's published a negative story that caused the price of the stock to fall. When the same sequence of events occurred a second time, several months later, that too was a coincidence, the company said.
Coincidence or not, the Barron's case cost Dow Jones tens of thousands of dollars in legal fees and should have warned the company that its conflict policy had enough loopholes to get Dow Jones dragged into court.
Since the Winans affair broke last spring, The Journal has been involved in yet another flap involving potential conflicts of interest.
A few weeks ago, Dow Jones & Co. and a group of other investors made an unsolicited bid to buy The Des Moines Register. For a newspaper, this is the most sensitive kind of story to cover, one involving its own parent company.
The Journal assigned the story to a former Des Moines Register reporter. That reporter still owned stock in his old company -- stock that would be worth several times what he had paid for it if the company were sold. The reporter was put in the untenable position of not only covering a story about his own employer (a no-win job, believe me), but also of having a personal financial interest in the outcome of the events.
The reporter was taken off the story by The Journal after Des Moines executives protested. Journal editors said they didn't know about the reporter's investment. Of course not -- as a matter of company policy, they never asked.
The reluctance of Dow Jones and Co. to circumscribe potential conflicts of interest should be no surprise considering the editorial positions the company takes on regulatory issues. The Wall Street Journal does not believe in tough regulation. Its editorial page loudly proclaims its laissez- faire attitudes; its personnel policies are certainly consistent with them.
If The Wall Street Journal doesn't believe in regulation, that ordinarily should be no one else's business. But Winans' prosecution has ominous implications for the entire business journalism profession. Should he be convicted, a legal precedent will be set that will subject every newspaper -- and newspaper reporter -- to oppressive new federal interference.
The Winans affair could become a textbook example of what happens when self-regulation fails to prevent abuses; the federal government steps in with an oppressive blanket that burdens the innocent as much as the guilty.
Given that threat, it is misleading to suggest that the whole problem is that R. Foster Winans is a crook -- the bad apple who spoils the barrel. Sometimes the problem isn't a bad apple, it's bad barrels.