Three men accused of insider stock trading underwent trial this week in Federal District Court in New York, Judge Charles E. Stewart Jr., presiding. The task of untangling a knot of press and securities law was begun. R. Foster Winans, a former Wall Street Journal reporter, allegedly sold information he had gathered before it appeared in the closely watched stock tips column ``Heard on the Street.''
Mr. Winans; his roommate, David J. Carpenter; and Kenneth P. Felis, a former Kidder, Peabody & Co. stockbroker, allegedly netted some $675,000 in a stock trading scheme. The three are charged with conspiracy, mail and wire fraud, and securities fraud.
The facts in the case are not at issue. The key question: Does such activity by a reporter constitute insider trading?
It does, contends the United States District Attorney's New York office.
But the laws covering insider trading were muddied by a Supreme Court ruling in 1980 which exonerated a printer who traded on company information he saw in the course of his work. Since then, several similar cases have returned some muscle to the body of insider trading law. Nevertheless, Don Buchwald, Mr. Winans's attorney, argues that in this case insider information was not involved; that facts gathered by Winans were not confidential among just a few corporate officials but openly available to any reporter.
In opening statements, Assistant US Attorney Peter Romatowski said that Winans and the others knew that what they were doing was fraudulent, using fake names and pay telephones to cover their tracks. It is argued that Winans in effect stole the information that was the property of his publisher and used it for personal gain.
Mr. Buchwald agreed Winans had broken the newspaper's ethical code against buying and selling stocks he wrote about. But that isn't against securities laws, Buchwald contended. He likened it to a brokerage firm buying or selling stocks before a public prediction by its economist that interest rates would fall. Unethical perhaps, but not illegal, he argued.
So far this week, much of the testimony has been given by Wall Street Journal editors, who said they told Winans several times not to invest in the stocks he wrote about. The prosecution's questioning is apparently aimed at establishing that Mr. Winans knew of the newpaper's conflict-of-interest policy and that his actions injured the Journal.
Buchwald's questioning of Journal editors Buchwald disclosed that it was not until after the incident that reporters were required to sign the conflict-of-interest policy. This questioning was apparently intended to raise doubts about the means of conveying the policy to Winans. Buchwald also questioned Journal editors on their own stock trading activities in light of the policy.
Initially, the Justice Department had also indicted Winans for carrying out a form of ``scalping'' -- buying stocks in advance of a recommendation and then profiting from the rise in price. This charge implies Winans had a fiduciary relationship with his readers -- that he had a duty to disclose which stocks he traded personally. This duty is typically applied to an investment adviser.
The press has raised all sorts of flags over this, since the Investment Advisers Act exempts general business publications. The charge was withdrawn in this criminal case. The Securities and Exchange Commission, however, has filed a civil suit which still contains this charge. The civil suit has been stayed pending the outcome of the criminal case.
In a recent speech, John Fedders, chief of SEC enforcement, said, ``Mr. Winans owed a duty to readers of the `Heard' column because of the unique circumstances that he was in. . . . When you have a reporter engaged in a scheme to take financial advantage of his readers . . . and that reporter controls the information and when he uses that information for his personal advantage before he releases control of it, does it for his economic well-being, then there is a fraud involved.''
And, said Fedders, ``I believe it is absolutely appropriate for the SEC to sue the butcher, the baker, the candlestick maker for insider trading, and it is equally appropriate, if not absolutely essential, that we have the same sort of vigorous law enforcement against reporters when they engage in these kinds of schemes. The Constitution does not immunize the newspaper employee relationship from any scrutiny merely because the end product of their work is protected by the First Amendment. And the First Amendment does not contain a right to commit securities fraud.''