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Stock Option Scandal: Make Shareholders Citizen Journalists

The Wall Street Journal has been leading the way in uncovering yet another corporate scandal: stock-option cheating in which corporate CEOs have apparently been rigging the dates of options grants to give themselves what amounts to free money. Imagine that you could enter a lottery the day after the winning numbers were announced, and you have the general idea of what these people have been doing.

It’s nothing less than stealing from shareholders to the tune of millions of dollars. The guilty among these folks should be doing time, not riding their corporate jets.

While other media have begun to get serious about this story (see these Google News search results), the Journal has done by far the most outstanding work on this story since its first scoop, with the knife-edged title of “The Perfect Payday,” appeared on Page One back in March. Not a week goes by without more revelations of yet more probable (or confirmed) boardroom thievery.

(Here is a round-up page, and a clever scorecard on the public part of the site; unfortunately, the best stuff, like most of the news organization’s content, is trapped behind a subscription pay-wall, so many of you will have to take my word for it when I offer such praise.)

Fine as the coverage has been, this story is too big even for the Journal. There are thousands of publicly held corporations in America, and only a few reporters, however excellent, assiduously turning over the rocks.

True, some stock analysts are now racing to determine whether the people running companies they follow have engaged this financial trickery. But again, there aren’t enough analysts, either, to discover just how deep this rot goes into corporate America.

Now, it’s not entirely simple to figure out whether there’s been funny business with stock grants. I don’t know, moreover, whether the Journal has a well-developed system for compiling and analyzing vast numbers of cases simultaneously. All I can say from reading the stories is that the Journal is apparently using methodology mostly of its own creation, vouched for by some (unnamed?) academic experts, to figure out whether a given company’s managers have been pulling a fast one.

So here’s what I’d like to see the Journal do now: Embark on a national effort in which the paper “deputizes” the shareholders and other interested readers to help with the research.
This is made to order as a computer-assisted project with a major online component. How? The Journal could create an online tool into which any self-appointed citizen journalist could:

  • Look up the relevant data for a given company, using the Securities & Exchange Commission’s database of corporate filings and other public data sources;
  • Plug the correct numbers, along with the URLs of the SEC filings from which the data came, into a calculator that determines, based on the researchers’ methodology, whether the odds suggest that the executives in question are either the luckiest people on the planet or, more likely, engaged in chicanery;
  • And, finally, upload the results to 1) a Journal database, which should be made public so that others looking at the same companies will either not bother or, better yet, doublecheck the results; 2) the SEC; 3) federal prosecutors in relevant jurisdictions; and 4) regulators in the state where the company was based (especially including New York, which has the toughest state laws against corporate wrongdoing).

This Web-based toolset should include some serious teaching materials, such as an easy-to-understand explanation of how to find the data, likely to be buried deep in a corporate report or even a footnote. (This alone — helping investors and potential investors better understand the arcania of corporate filings — might be worth the effort all by itself, given its educational value.)

In relatively short order, I predict, the Journal and the cops on the financial beat would be well on their way to determining whether this is a scandal of limited scope or, as some fear, an all-too-common rigging of the system by the insiders against their purported bosses, the shareholders.

I’d want the public database to show all companies, not just ones where the options dates are suspicious. I’m a shareholder in several public companies, and would like very much to know that the people running them are honorable, at least in this regard. I’d like even more to learn that we’ve already learned about the worst of this scandal, that it doesn’t go as deep as we might suspect.

I suspect the Journal, which has a terrific collection of online resources already devoted to this story, will balk at the idea of putting the data online before the paper’s own journalists have vetted the data that comes in. In today’s litigious world, that would be understandable.

But if so, I hope some other entity — perhaps a foundation or even another publication — will step up and do create this public database. It might be a good Wiki project, with some controls to prevent gaming by people who want to make unfair accusations or delete fair ones.

Whatever the hurdles or flaws in what I’m suggesting — please point them out — we need something like this. I’ll do what I can to help if someone wants to put it together. (If the Journal doesn’t want to consider it, maybe the New York Times — which is so far behind on this story as to be almost invisible — would be interested in using this method as a way of catching up and even going ahead.)

Some kinds of big projects lend themselves to what I’ve called “distributed journalism” by citizens. This is one, and it would work well as a a collaboration among the professionals and the members of the former audience who care enough to join in a valuable effort.

Newspapers and other traditional media organizations need to involve their audiences in the journalism. But the professionals can’t assume that everyone else knows the techniques and principles that become second nature to those of us in the business.

In the future of journalism where we work together in a more diverse and robust ecosystem, the professionals need to be teachers, too. Here’s one of those moments when we could help each other, and do some genuine good.

19 Comments on “Stock Option Scandal: Make Shareholders Citizen Journalists”

  1. #1 The New Market Machines » Blog Archive » The Vigilante Shareholder Option
    on May 27th, 2006 at 10:50 am

    […] Dan Gilmor, late of Bayosphere—sold off to Backfence—and now leading the nonprofit Center for Citizen Media has a modest proposal for the Wall Street Journal as it covers the options backdating affair: Make Shareholders Citizen Journalists […]

  2. #2 Colin
    on May 27th, 2006 at 11:05 am

    This notion of shareholder democracy is admirable, but it neglects to take into account that the majority of shareholders are likely to be institutional investors and mutual and hedge fund managers holding the proxies of their own shareholders. These institutions are already quite capable of modeling options grants to single out potential back-dating, and to do so in a highly automated fashion using commercial market data and corporate actions databases.

    Since most Joe Sixpack investors own shares through mutual funds or institutional investors like pension plans, it might be more effective to organize a letter-writing campaign asking these institutions what they are doing to detect this sort of lapse in corporate governance, since they are the ones with the direct fiduciary duty to Joe Sixpack in most cases.

    See The Vigilante Shareholder Option.

  3. #3 Amgine
    on May 27th, 2006 at 12:09 pm

    Wikinews can host the journalism, if knowledgable people are interested in working on it. And WikiMedia sites (such as Wikipedia and Wikisource) can be integrated into the project as well.


  4. #4 Seth Finkelstein
    on May 27th, 2006 at 4:52 pm

    Serious comment:

    If what you need is semi-skilled data-entry, how hard is it to fob the task off on some interns? Why go through elaborate casting of it as a (volunteer) job for unpaid freelancers, err, “citizen journalists”, when it’s just grunt work that can’t be automated because it requires some reading and interpretation. Moreover, at least the interns might get some experience with reading primary sources, which would be professionally useful, something that won’t help J. Random Time-Donor.

    Alternately, pitch some of the class-action landsharks for paying people to do it, with the data as a potential source of shareholder lawsuits.

    Don’t think in terms of “How can we get the suckers, err, global conversation participants, to do this for free?” Instead, “Who would benefit directly from such a database?”

  5. #5 Dan Gillmor
    on May 28th, 2006 at 4:17 am

    Serious reponse: If the shareholders wouldn’t benefit from this, who would? It’s their money that’s being stolen.

    And it’s more than data entry, as I mentioned in the posting. It’s learning some of the ins and outs of corporate financial reporting. This is exercise would be good for the shareholders if they actually care about understanding what executives are doing with their capital.

  6. #6 Jim Howe
    on May 28th, 2006 at 6:53 am

    Good idea – I think there are potentially thousands of individuals for whom this kind of sleuthing, even if all it is is a form of data-entry that requires a little bit of training to do properly, is exactly right. This small community would get to know itself and would glory in its successes small and large.
    This database must not be editable like a wiki, though, but rather all entries should be preserved as-is in order to provide some kind of accountability in the entries. In other words, just like an accounting system you need an audt trail for the entries made. Never a deletion of an entry, just a cancellation or modification record made by the original poster of a particular entry.
    Someone being accused deserves fair treatment, otherwise the thing is worse than a witch hunt.

  7. #7 John Bujack
    on May 28th, 2006 at 8:48 am

    Most of the top brass in institutional, hedge and trust funds will do Nothing to help expose this fraud. Why ???. Simple. Most of them are awaiting their turn to join the racketeers club that calls itself big business management so they have no intention of rocking the boat.
    Have you ever noticed that whenever ordinary shareholders in a company try to reign in the ridiculous and obscene pay packets for company heads that it is ALWAYS the institutional, hedge and trust fund reps that support the ridiculous salaries.
    Good luck Mr. Gillmor, I hope your idea gets lots of support but don’t expect any from the fund groups.

    Cheers. John.

  8. #8 Wayne
    on May 28th, 2006 at 10:37 am

    I think a lot of people are missing several points:

    1) This is a great way of educating shareholders.

    2) If a manager is ripping off a company this way, are they not also doing so in other ways?

    3) The shareholders are the owners – and have a right to make sure that the management that they pay to run the company is operating in a legal manner.

    4) Many managers will be against this – as they were against Sorbanes-Oxley. You have to question their reasons for opposing something that is designed to bring more openess and honesty (ethics) into business.

    Now I don’t know that the problem is widespread. No one does. And that is an important consideration. If the issue is widespread, and we don’t know about it, it needs to be brought out into the open.

    There is a certain percentage of managers who operate in an ethical manner, just as there is a certain percentage who operate in an unethical manner. Right now we don’t know what the percentage of each is. Openess is important, whether it is in politics, business, or religon. If someone is hiding something from you, it is never for your benefit.


  9. #9 Seth Finkelstein
    on May 28th, 2006 at 11:20 am

    The problem is that there’s a significant learning curve, and very few people will want to get up that curve, especially so that they can volunteer for grunt work. Maybe they “should”, like they should exercise every day – but they won’t. And the potential that any particular shareholder will detect a problem in a stock they own, is very, very, small. The expected return of the effort is much less than the opportunity-cost of the effort, for any particular person.

    What I meant by data-entry is that you’re asking people to find the right data from an unstructured document. It’s not like it can be scanned and run through optical character recognition, or exacted with a computer program written once. But given that there’s a significant amount of time that has to be invested for each person to know how to find the right data, that does not readily lend itself to being outsourced to rubes, err, civic-minded community participants. So the natural workable labor pool for it is low-status people “paying dues” (i.e. below pure market-rate labor) for professional advancement, and/or as a research task for shareholder-lawsuit firms.

  10. #10 Dan Gillmor
    on May 28th, 2006 at 6:23 pm

    I’m not suggesting that people go out and hunt for needles in haystacks by themselves. I am saying the Journal (or someone else) should help them by explaining a) specifically what to look for; b) where they’re likely to find the numbers; and c) why this is a useful exercise. How does that require a significant amount of timem from the investors? I don’t see it, especially when they’re likely to be learning something useful.

    If they’re not interested, fine. But all it takes is a couple of shareholders for each company. (And it’s really not helping your argument to call them rubes.)

  11. #11 Seth Finkelstein
    on May 28th, 2006 at 7:04 pm

    First they have to *read* a), b), c). Then they have to dig through the reports and try to apply it. That’s a significant amount of time. Especially since people who own stocks, and also *care* about stocks, tend to be among the busier people (though I’ll grant retirees might have the leisure).

    How would the correctness (or lack thereof) of my argument ever be affected by whether or not I spoke of “marks”, or “graciously volunteering public-minded democratized wise amateur citizen-analysts”? An estimate of time required and willingess is either accurate or not – the “color” I use is irrelevant (ok, it matters whether or not I’m considered an insider or outsider in terms of group signaling, but I crossed that bridge a long time ago).

  12. #12 » Blog Archive » Undersøkende leserjournalister kan styrke journalistikken
    on May 30th, 2006 at 3:39 am

    […] Den utrettelige forkjemperen for grasrotjournalistikkens fremvekst, Dan Gillmor tar i sin blogg til orde for at selveste Wall Street Journal danner et tettere samspill med sine aksjeeiende lesere. […]

  13. #13 Dan Gillmor
    on May 30th, 2006 at 8:19 am

    Seth, I do challenge the correctness of what you say, not just the tone in which you say it.

    You have such antipathy toward the very notion of volunteer, distributed journalism that you won’t even acknowledge the possibility that it might work in some cases. I think this is one, but we won’t know for sure unless someone tries.

  14. #14 » Gillmor: Make stock option scandal a citizen journalism project
    on May 30th, 2006 at 9:09 am

    […] Read more here. […]

  15. #15 Seth Finkelstein
    on May 30th, 2006 at 9:25 am

    Let’s put it this way – I have a very dim view of “Unpaid Freelancing”. For every bubble-stock-style success story, there’s a huge number of dot-crash-type unpublicized failures. But the claim that I “won’t even acknowledge the possibility that it might work in some cases” is false. HOWEVER, the *possibility* is a very weak argument for the *actuality*.

    I’m in fact pretty interested, sociologically, in what makes this stuff tick – but I do have a view of it that’s much less promotional, and, to be fair, much more cynical.

    On the specifics, once more, my basic analysis is that this project is not a good candidate for outsourcing to voluteers, because of the high upfront learning curve, the interpretive skill required, combined with the tedium of the work. However, the relative professional value of the data makes it well-suited for journalist interns and/or legal-firm researchers. Hence my recommendation to pursue those avenues to realize it, and both are venues where you have some connections (you might give me some credit for having two positive suggestions on alternate ways it can be achieved, even if I am sardonic about the joys of being a data-miner).

    Of course “we won’t know for sure unless someone tries”. But that’s different from an estimate of whether it’s *likely to succeed*.

  16. #16 Dan Gillmor
    on May 30th, 2006 at 9:43 am

    Your two positive suggestions were effectively to re-create the top-down model, which I’m trying to avoid in this case. But they might well work, just as this might work.

    Let’s agree to disagree, but feel free to have the last word.

  17. #17 Anon
    on May 30th, 2006 at 12:18 pm

    I gotta agree with Seth’s comments – requires READING on the part of the volunteers. Heck, I gotta wonder how much you actually read this Dan … and weren’t you a tech reporter at the Mercury News or something like that … so your inaccuracy and omissions jumped out at me as shown below.

    WSJ reporting is (as usual) absolutely top-notch … and they should win a Pulizer Prize for this great story. And yea, New York Times got scooped badly – heck, the data is all public record, amazing it didn’t pop up until now – says something about the quality of journalism these days I think.

    WSJ *did* explain how/who analyzed it. You wrote above:

    “All I can say from reading the stories is that the Journal is apparently using methodology mostly of its own creation, vouched for by some (unnamed?) academic experts, to figure out whether a given company’s managers have been pulling a fast one.”

    Here’s the first two paragraphs that explains this for you Dan – was an obvious link from the article. And subsequent reporting has detailed this along with other academic experts they have consulted. I included the second paragraph below because you failed to mention how this is MUCH less of an issue now. But we’ll see the pre-SO unetherical dealings reverberate for a few years as earnings from back then are re-stated and some people go to jail.

    How the Journal Analyzed
    Stock-Option Grants
    March 18, 2006; Page A5

    The Wall Street Journal asked Erik Lie, an associate professor of finance at the University of Iowa who has studied backdating, to generate a list of companies that made stock-option grants that were followed by large gains in the stock price.

    The Journal examined a number of the companies, looking at all of their option grants to their top executive from roughly 1995 through mid-2002. Securities-law changes in 2002 curtailed the potential for backdating a grant.

  18. #18 Andrew Lih » Blog Archive » Mark Cuban - Anti-stock-fraud web site
    on Jun 13th, 2006 at 5:28 pm

    […] News is out that Mark Cuban is funding, with the help of veteran business reporter “Christopher Carey, a 17-year St. Louis Post-Dispatch staffer,” and citizen journalists. Dan Gillmor suggested such a project back in May. …Cuban is financing a new Web site that will investigate stock fraud and corporate wrongdoing. The billionaire also said he’ll buy and sell stocks based on information before the site publishes it. […]

  19. #19 Distributed Journalism Conversation at Pressthink, Bloggercon | Center for Citizen Media: Blog
    on Jun 18th, 2006 at 2:50 am

    […] The answer is absolutely. Read the posting and comment thread for some good discussion. Here’s what I posted: Generally speaking, what we’re discussing here are projects that can be broken down into little pieces where lots and lots of people can ask one question, or look at one document, or solve on piece of a big puzzle. Then the results are aggregated, parsed and reassembled into a coherent whole. It’ll almost always require some folks at the center. We used to call them editors. Reading all the laws is a great project, but I think it’s too big to chew on except as a long-term goal. I’d suggest paring it down to something smaller and much more essential: The next time Congress gets ready to pass an appropriations bill of any sort, we need an army of lawyers and others who understand legislative language to parse it *before* it’s passed. This may not be possible, of course, given the leadership’s increasing tendency to force members to vote on bills they haven’t had time to read, and after injecting last-second stuff that no one except a few staffers and lawmakers knows about. The way to experiment with this is to take it down a level, to the state legislature. Pick a state that’s relatively uncorrupt and do roughly the same thing. The project will be more manageable, though you’ll probably find less, if much at all, of the material that turns into headlines. Last fall, by the way, I proposed that major media organizations bring in the citizens for a project on the Katrina reconstruction. No takers, unfortunately, but I still think it was a good idea. (One organization is still thinking about doing this but hasn’t acted.) I also, more recently, suggested that the Wall Street Journal expand its brilliant coverage of the stock-options scandal and do a thorough, citizen-driven database of how widely (or not) this sleaze has spread. Stay tuned on this one. As to the question of whether it’s a good idea to tell your competition what you’re working on, this depends on what you want to accomplish and whether it matters if the thing is done in full view in the first place. Is the goal to do good journalism, to serve the public? Or is it a professional scoop? Wouldn’t someone “stealing” the idea be seen as a thief, if he/she used the material gathered under your wing without credit? And aren’t there many kinds of investigations where it’s just fine to let the targets know they’re being investigated? I don’t expect Seymour Hersh to tell us ahead of time precisely what he’s working on. But many, many kinds of investigations are better done in the sunlight. Some — like the ones we’re talking about here, where there’s no way to do them without massive help from the community — should be done that way. […]