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David Spencer Seconi

David Spencer Seconi

Posted: October 20, 2010 12:28 PM

The normal investor cannot be in all places at all times. No matter how much he knows about the market, he or she will always need to read reports, news stories and professional opinions about the companies in which they are interested in investing.

Speed, moreover, is the name of the game in the modern finance industry. Decisions have become a quasi-mob mentality, whereby one piece of news can set off a firestorm in the markets, e.g. China's recent decision to raise interest rates.

Thus, the individuals in control of the production of news do, in many ways, have a powerful influence on the movement of the market. Releasing a rumor about a failed drug test can move a pharmaceutical's stock price; a debt-to-equity ratio analysis can rattle the market; potential shake-ups in corporate personnel can damage investor confidence. While facts are facts, it is more often the interpretation presented that is important.

Therefore, it should be a given that those writing about corporations and financial firms should not have any financial stake within them. A recent scandal at Reuters, however, shows how difficult it still is to monitor and prevent these unethical acts. Neil Collins, a well-known British financial analyst for Reuters Breakingviews, was discovered to have numerous articles in which he failed to disclose that he had a major financial stake in the companies he was covering. In one specific case, Collins had purchased shares of BP both before and after he had published a piece on the story.

His excuse? That he had committed an honest oversight.

Collins is no small fry. He is a serious author whose articles are reprinted in major papers around the world. When he fashions an opinion about such and such company, investors react.

Reuters, unsurprisingly, has announced that it is launching a full-fledged investigation into the financial interests of its other writers. With good measure: if the problem is discovered to be systemic, its journalistic integrity, and subsequently its entire financial-reporting business, could be in serious jeopardy. It has already announced that over 50 articles have been compromised by integrity issues. Expect them to react, therefore, and to react quickly; a scandal of this magnitude will cripple readership confidence that is excruciatingly difficult to recover once lost.

Already they have mentioned the possibility of disclosing all of the relevant security holdings of its writers under every article. This is a positive first step that we could soon see throughout the industry in order to calm the worries of other investors.

Like conflict of interests that we often see in medical journals, it is shameful when those who are writing do so not out of respect for their field but to make money off of the readers who cannot be expected to know better.