Chapter 3 backgrounds
As discussed in the previous sections, journalism has a risk to suffer from pressure of its ownership, advertisers, and sources. This section will present the actual examples of the problematic aspects of business/financial journalism. The Enron and other similar business scandals show how difficult the business/financial journalists could detect the truth. In addition, business/financial journalism has a risk to commit a crime like the insider dealing, because it can obtain the unreleased information earlier than the public. The Mirror (the United Kingdom) and Nikkei (Japan) actually faced with this problem. To regulate themselves, the Press Complaints Commission (PCC) sets the Codes of Conduct. This insists the importance of the morality and self-regulation, and shows the potentials for the media to be tempted in many ways.
3-1. The Frauds
3-1-1. Enron
Enron had been the one of the largest natural gas and electric marketer company. It was reported that the annual revenue were more than $ 150 billion. However, Enron actually had overstated its revenues and assets while Fortune chose it as the one of the “100 Best Companies to Work for in America”, and number seven on the Fortune 500(Longman 2002, Vasilescu and Russello 2005). Almost all the business/financial journalism had only played just a part of the bubble, and contributed to many people to be deceived without detecting the fraud (PS Burton 2002, Uskali 2005).
What Enron had done was self-dealing, “acting on both sides of the deal” (Deakin and Konzelmann 2003: 9). It had also involved mark-to-market accounting.
“Enron abused mark-to-market accounting to a staggering degree applying it in ways never intended, such as marking assets to the value of spreadsheet projections (“mark-to-model”) and to prices set by Enron itself in markets where Enron was effectively the market-maker (“mark-to-my value”)” (Stewart 2006: 116).
How was the way of reports in business/financial journalism? For example, The Wall Street Journal has reported Enron frequently. The following table shows the number of headlines about Enron in The Wall Street Journal since 1997. This data is the result of its advanced research on the website. The number of 2006 is the data from 1 January to 30 August except the headlines of law weblog.
(Source: The Wall Street Journal Online)
Until the time when the wrong doing was revealed, most of the articles failed to detect except the article on 17 October 2001, which wrote about Andrew Fastow, the chief financial officer at that time “entered into the unusual arrangement with his employer” and “It isn’t clear from Enron filings with the Securities and Exchange Commission what Enron received in return for providing these assets and shares”2. The time this article was written was right after the announcement of the third quarter loss. The Wall Street Journal reported Enron’s $1.01 billion charge connected with write-downs of investments, and warned “the risks the onetime highflier has taken in transforming itself from a pipeline company into a behemoth that trades everything from electricity to weather futures”. After this, many rating companies like Moody’s Investor Service downgraded Enron’s long-term debt. The value of Enron’s stock sharply declined, and on 2 December 2001, Enron declared bankruptcy.
According to Carson, “executives could conceivably have believed that the sort of fraud and deception they practiced promoted the interests of shareholders” (2003: 392). Enron had especially focused on earnings per share (EPS). Stewart introduces the message from the former Enron chairman Ken Lay and the former Chief Executive Officer Jeff Skilling in the letter to shareholders as “Enron is laser-focused on EPS, and we expect to continue strong earnings performance” (2006: 116). They had been feeling the pressure from shareholders who had required a much higher return to ensure the compensation for their investment.
3-1-2. WorldCom and Livedoor
The fraud of WorldCom is similar with Enron case. WorldCom overstated the income, and misled investors. The US Securities and Exchange Commission (SEC) alleged that “WorldCom, led by Chief Executive Officer (CEO) Bernie Ebbers, misled investors from at least as early as 1999 through the first quarter of 2002” (Vasilescu and Russello 2005: 4). In July 2002, WorldCom entered bankruptcy. Carson summarises “the Enron and WorldCom cases highlight some serious problems with rosy view of laissez faire capitalism endorsed by many defenders of capitalism and the shareholder theory” (2003: 392).
The case of Livedoor, a Japanese internet company, is also similar with Enron and WorldCom. According to the Financial Times, the executives were arrested in January 2006 because of “suspicions of accounting fraud and market manipulation” (Nakamoto and Lucas 2006).3
3-1-3. The Sarbanes-Oxley Act
The Sarbanes – Oxley Act was signed into law in 2002. It is to protect the investors by improving the accuracy and reliability of corporate disclosure. This act is created based on the reflection of Enron’s fraud. It established the Public Company Accounting Oversight Board, which oversee the public companies’ auditors for fairness and independent audit reports. According to Vasilescu and Russello, “prosecutors provided the DOJ [the US Justice Department] and the SEC [the US Securities and Exchange Commission] with powerful tools to pursue corporate misconduct” (2005:7). For example, it “provided for new crimes for securities fraud and conspiracy to commit securities fraud” (2005: 8).
Senator Paul Sarbanes, one of the authors of this act, describes this on his website as “The legislation creates a strong independent oversight board to oversee the auditors of public companies and enables the board to set accounting standards, and investigate and discipline accountants”4.
3-2. Cases of Insider Trading in News Organisations
3-2-1. The Mirror
In 2000, the Press Complaints Commission (PCC) condemned two columnists and one editor of The Mirror for their financial actions (Sanders 2000: 124). Anil Bhoyrul and James Hipwell were the columnists of ‘City Slicker’ of The Mirror, and they purchased shares which they featured in their column. According to the BBC reports (2005, 2006), Bhoyrul pleaded guilty and was punished a one hundred eighty-hour work for the benefit of the community, and Hipwell was found “guilty of conspiracy to breach the Financial Services Act”. Hipwell was jailed for stock market abuse in February 2006 (Hipwell 2006)5.
Moreover, Piers Morgan, the editor at that time, also bought shares that had been tipped by these columnists. He confesses it in his dairy book, ‘The Insider’ as follows:
“MONDAY, 17 JANUARY
I’ve been dabbling a bit in the stock market and bought shares today in a company called Viglen Technology, one of Alan Sugar’s companies. Our ‘City Slicker’ columnists, Anil Bhoyrul and James Hipwell, have tipped them several times since the start of the year, and both my broker and my uncle have also recommended them to me recently, so they sound a good bet” (2005:249).
He does not seem to have any ethical guilty feelings at this moment. However, he writes his restless feelings a few days later.
“SUNDAY, 23 JANUARY
A small piece appeared in the Sunday Business Newspaper today saying the Financial Services Authority were having a look at trading in Viglen shares to see if anyone had been ‘insider dealing’. It leapt off the page. I am now seriously uneasy. I was a bloody fool to be buying shares without checking what they were tipping in their column” (2005: 250).
The PCC summarises that Morgan’s and two columnists’ behaviour as “serious breaches of financial journalism provisions of the Code of Practice” and “Mr Morgan had not taken sufficient care to ensure that his staff were acting in accordance with the Code”. 6
In the investigation of the PCC, Morgan’s amounts of purchase were reported as 20,000 pounds. However, in 2005, during Hipwell’s trial, it was revealed as 67,000 pounds. In 2006, a former editor of The Mirror, Roy Greenslade requested to reopen the Commission and the reassessment. He assumed that the Trinity Mirror management “had conspired to give false evidence to the Commission” even though he had told the total cost as 67.000 pounds. The PCC confirmed the company and concluded it could not find the evidences to suggest the conspiracy to present the false information to the Commission. In addition, it recognised that the value of the shares was irrelevant to this matter. As a conclusion, the PCC criticised the company that “non-disclosure affected the integrity of the PCC’s work” and The Mirror’s case is “Serious breaches of the Code of Practice” ( The PCC 2006).
3-2-2. Nikkei
In Japan, one employee in advertising section of Nihon Keizai Shimbun, Inc. (Nikkei) arrested because of insider trading by accessing the companies’ data for its advertisement (AFX 2006). In July 2006, this person was arrested by the Tokyo District Public Prosecutors Office on suspicion of insider trading. This employee made his profits by accessing buying the shares of five companies which brought Nikkei their unpublished legal notifications as advertisers. The information should be kept as confidential. Nikkei told employees in the editorial, advertising and sales bureaus to stop trading in stocks.
3-2-3. Codes of Conduct
There is one independent organisation called the Press Complaints Commission (PCC) in the United Kingdom. It sets the code of conduct which “attempt to encourage or enforce ethical standards in the media” (Welsh et al. 2005: 381), specifically all national and regional newspapers and magazines. It is a self-regulation guideline for journalists. The latest version of PCC’s codes of practice was ratified in August 2006.
Clause 13 of the codes is about the ‘financial journalism’, and it has three guidelines. Firstly, it is about the dishonest use of the information for the journalists’ profit. Journalists must not use the financial information receiving through their activity for their own profit “even where the law does not prohibit it”. Secondly, it is about the disclosure of journalists’ own financial interest in case of writing. They must not write about the companies’ shares or securities which they or their families have an interest without telling the interest to the editor. Lastly, they must not deal with the companies’ shares or securities which they are going to cover or recently covered (see the Appendix).