NEWS ANALYSIS : Who Can You Trust? : Dorfman Case Revives Media Ethics Issues

Money magazine Managing Editor Frank Lalli wrote a column in April in which he chastised rival Smart Money magazine for allowing one of its writers to tout stocks in which he had a personal stake.

Lalli said he acted because of “the public’s growing cynicism about how financial journalists approach their work,” including what they decide to report and whether they have conflicts of interest that the public should know about.

Ironically, Lalli now has an ethics problem of his own in a case that also raises questions about how reporters gather and deliver market news to investors.

Dan Dorfman, Money’s star columnist and stock tipster extraordinaire in print and on television, reportedly is being investigated by federal authorities for his relationship with a public relations man, Donald Kessler, who is said to be one of Dorfman’s regular sources of stock tips.

The probe was reported last week by BusinessWeek magazine, which quoted anonymous sources as saying the U.S. attorney in Brooklyn is investigating both men for possible illegal insider trading, wire and mail fraud and violations of securities laws.

The Securities and Exchange Commission also reportedly is looking at the Dorfman-Kessler connection, although the agency as a matter of policy does not confirm or deny its investigations.

Both men have denied doing anything wrong.

BusinessWeek said Kessler earns five-figure fees from client firms to arrange meetings between them and Dorfman, whose daily broadcasts on the cable channel CNBC--with an audience of more than 500,000--can by themselves move prices of stocks he mentions.

It’s rare that business reporters and commentators are accused of doing stories for personal benefit. But when those cases do arise, such as the 1980s scandal involving a Wall Street Journal markets reporter, they reignite the public’s latent mistrust of those who give information about the markets.

Any loss of integrity for journalism is particularly damaging because the public often looks to the media to counter its considerable mistrust of Wall Street, corporate America and the government.

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The stakes are also higher than ever. Americans increasingly make their own investment choices and so rely more on the financial media. The media, in turn, are under constant pressure to give investors the latest “hot” ideas for building wealth.

Dorfman is probably the nation’s best-known market commentator. A hyperactive figure whose frenetic delivery sometimes leaves him nearly shouting at the TV camera, he specializes in passing along market tidbits, especially about firms he hears are (or might be) involved in mergers and acquisitions.

BusinessWeek said it turned up no evidence that Dorfman received payment from Kessler for any stories. But it said investigators are probing whether Kessler got his clients special access to the 63-year-old Dorfman and, in turn, the public airwaves.

Dorfman and Kessler denied any wrongdoing in the article, but Money magazine agreed to place Dorfman--whom it hired a year ago from USA Today amid much fanfare--on a leave of absence while he deals with the matter.

He is still appearing on CNBC. Spokespersons at his offices at CNBC and Money said Wednesday that he was declining interview requests.

But Kessler’s lawyer, Gregory O’Connell in New York, termed the allegations in BusinessWeek “a lot of nonsense.” He added that no federal agency has yet contacted Kessler to inquire about his work with Dorfman.

Asked about that relationship and the fees Kessler earns, O’Connell said only that Kessler “works in public relations and it’s a legitimate business.”

Eric Rieder, a securities lawyer in New York and a former newspaper reporter, said one problem with Dorfman’s information is that “you know very little about who his sources are or how he picks them, or what their interests are or what clients they’re serving, and I think that is a real problem.”

Rieder--who, like other observers interviewed for this article, said he had no personal knowledge about aspects of the reported Dorfman investigation--noted that reporters routinely use anonymous sources, just as BusinessWeek did in the Dorfman article.

But he said that “the problem is particularly great with someone who occupies the role that Dan Dorfman does, because Dorfman has this enormous power and so there is an enormous potential for abuse.”

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Careful analysis is not Dorfman’s trade; getting tips and being the first to announce them are. He lives for the scoop. “I love breaking news stories,” he once told an interviewer.

Because he’s on TV every day, Dorfman relies on a network of sources for a steady flow of information. But Dorfman’s willingness to constantly pass along those tips before they can all be carefully checked is what troubles some observers.

“Dorfman has been a tool of Wall Street for years,” said Joseph Nocera, an author and contributing editor to Fortune magazine. “My problem with Dorfman is that he’s a purveyor of Wall Street gossip and has allowed himself to be used by the Street. You can’t say he did anything wrong or illegal, and obviously there’s a voracious appetite for what he does. But it is certainly misleading.”

The most publicized case of malfeasance by the financial media came to light in 1984, when it was discovered that Wall Street Journal reporter R. Foster Winans had been tipping off brokers in advance about the contents of the influential “Heard on the Street” column, which he co-wrote at the time.

The group earned trading profits of nearly $700,000 based on stocks Winans covered, with Winans getting about $30,000. Winans subsequently was convicted on two federal fraud statutes and served seven months in jail.

Other cases involved no crime, but still raised questions about the media’s integrity.

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In 1992, Lou Dobbs, the business editor of Cable News Network and anchor of CNN’s “Moneyline” program on which Dorfman has frequently appeared, was criticized for being paid several thousand dollars to appear in promotional videos made by two major brokerage firms.

Dobbs said the videos were supposed to be for the firms’ internal use but that the firms showed them to clients without his knowledge. He denied doing anything improper.

Dean Rotbart, another former writer of the Journal’s “Heard on the Street” column, said Dorfman’s form of gossip is largely benign because his tips often don’t come true--and the public knows that.

“Dan Dorfman is to financial columnists what Babe Ruth was to baseball players,” said Rotbart, who now publishes the Journalist and Financial Reporting newsletter. “Ruth held the world record for home runs, and he also held the world record for strikeouts. People who listen to him [Dorfman] never know whether they’re going to get a home run or a strikeout.”

Also, Rotbart said, “I’d be very surprised if there are many investors who, when they read or watch Dan Dorfman, don’t know exactly what they are getting.”

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In an effort to prevent abuses, most news organizations have codes of ethics for financial journalists.

At Forbes magazine, as soon as a company is being considered for a story in his magazine, “no employee of the company can buy or sell that stock until three weeks after the issue date in which the story appears,” said Editor James Michaels.

At the Los Angeles Times, business writers are barred from investing in companies they cover and are obliged to tell their superiors about any investments that might be questionable.

The Wall Street Journal’s ethical guidelines also bar any employee “with knowledge of a forthcoming” article about a company or an advertisement--such as an announcement of a corporate takeover bid--from investing in that firm or encouraging anyone else to do so before the item is published.

Paul E. Steiger, the Journal’s managing editor, said these kinds of rules are one reason why “by and large the ethics of business journalism are on a very high plane, and as good as they’ve ever been.”

But, he added, an ethics code “doesn’t absolutely preclude a problem.”