The Talk of the Money World

By John Greenwald

A journalist's breach of ethics leads to a major SEC investigation

The "Heard on the Street" column of the Wall Street Journal (circ. 2 million) is always tucked onto the bottom of the paper's penultimate page. But its out-of-the-way position belies its importance as a mover of markets. A gossipy grab bag of investment tips, spot analysis and rumors about companies, the daily feature can drive stocks sharply up or down. Last week, though, the column itself was hot news on Wall Street. In an extraordinary front-page story and related articles, the Wall Street Journal disclosed details of what is shaping up as probably the most severe breach of ethics in the business publication's 94-year history. The case is also raising questions about the use of privileged or confidential information by anyone dealing in the stock market.

The unfolding account was a remarkable exposure of the inside workings of portion of the newspaper. It focused on Foster Winans, 35, one of two main "Heard on the Street" writers before he was fin two weeks ago. At that time, the paper said, Winans admitted to the Securities and Exchange Commission that he had leaked items from upcoming columns to investors. Among those who may have benefited was David J. Carpenter, 34, a former Journal news clerk and Winans' homosexual lover. The two men share an apartment in Manhattan's Greenwich Village.

The SEC last week continued to delve deep into the matter. The agency is examining every "Heard on the Street" column since August 1982 and has subpoenaed personnel records from several of the paper's staffers. The SEC is also investigating stock transactions of investors suspected of profiting from the leaks, as well as records of the brokerage houses that handled their trades.

The Journal, which said it does not believe that any other reporter leaked information, has been cooperating fully. Two weeks ago, Managing Editor Norman Pearlstine and Richard Rustin, Winans' supervisor, testified before investigators in Washington. The newspaper, however, found itself in the unusual position of urging staff members not to discuss the case with the press.

While the paper reported that it did not know what, if anything, Winans got in return for the leaks, which violated a detailed Journal ethics policy,-- it noted that the columnist frequently complained about the size of his salary. He continued to do so after receiving a $35-a-week raise last November that boosted his weekly income to $610. Among other things, Winans said he was distressed by the large medical bill owed by Carpenter, whose health had been weakened by a case of leukemia that has been in remission for years.

There may have been reasons for the leaks other than just financial gain. "Heard on the Street" writers are strongly encouraged to dig up scoops, according to one former reporter at the paper. As a result, a column writer could be tempted to swap information with a news source in exchange for fresh tips. "Out of a galaxy of motives," said the ex-staffer, "it is conceivable that there is but one element: simple pressure to get a story."

Whatever the reason for leaking the information, confidential material can mean hefty payoffs for those who receive it. In its probe, the SEC is examining records of New York City Attorney David W.C. Clark to see whether he profited from leaks. The Journal said Clark invested in stocks and options of at least six companies just a while before Winans wrote about them. By selling them shortly after the columns appeared, Clark made $100,000 on three of the deals, according to the paper.

The disclosures about Winans surprised many friends and colleagues. Acquaintances described him as witty, well mannered and a person "who didn't take himself too seriously." He had a knack for getting along with those he wrote about. Recalled one associate: "While a lot of reporters seem ill at ease when dealing with business people, he was not."

Winans, whose brother Christopher, 33, is a Journal copy editor, apparently had at least one blemish on his record. At the Trentonian, a New Jersey tabloid on which he worked as a reporter for four years, former colleagues say that Winans once pirated details from other reporters' notes and used them to write a freelance article that he then sold to the New York Times. He was reprimanded by a Trentonian editor and did not repeat the practice.

Winans rose quickly after leaving the Trentonian in 1981 to become a $379-a-week copyreader at the Dow Jones News Service, a Journal affiliate. The following year he was promoted to the newspaper as a "Heard on the Street" writer. Although he received a written warning after making four factual errors, he improved enough to win a raise. Said Pearlstine: "In spite of the reprimand letter, I thought Foster was doing a fine job in most respects."

The "Heard on the Street" column for which Winans started to write was influential but had lost a bit of luster in the past few years. Begun in its present format in 1967 by Charles Elia, the feature became an institution during Wall Street's go-go days. Says Elia, now an investment manager: "The whole idea was to get at something that was creating movement in stocks, to try to learn as much as we could. In the early years firms were reluctant to release their research findings and we had to pry it out." Elia was joined in 1968 by Dan Dorfman, now a syndicated financial writer. "Dorfman wrote a very electric column," recalls a former Journal reporter. "He broke one or two stories a week that had everyone on tenterhooks. Since then, it has never had that electricity."

Dorfman and Elia said they had often been pressured to reveal column items before they were published. "You get that," said Elia. "You have to be very careful and very savvy about motives. You have to know your sources and the axes anyone has to grind." Conceded Dorfman: "There are always going to be leaks. There is no way to prevent them." Simply calling a company for information, Dorfman said, can indicate that a story could be forthcoming.

Despite the fall-off in vitality, the "Heard on the Street" column is still avidly read. "It's something that people turn right to," says Jay Marshall, a Merrill Lynch broker in Beverly Hills. "The stocks in the column get a lot of action." Concurs Jay Goldinger, a California investment adviser: "I don't read it for hot tips. But you have to know what's in the column so you'll know what's going to be happening in the market."

The feature's impact was reflected in a recent survey by Norman Fosback, a newsletter publisher in Fort Lauderdale, Fla. Fosback studied "Heard on the Street" columns published during 1983 and found that stocks discussed favorably quickly climbed about 6% in value, while those that were criticized fell about the same amount.

Some Wall Streeters professed little surprise about the newspaper leaks. Said one: "No oneever had the view that everyone is perfectly clean." Swapping facts and gossip about companies, moreover, is a favorite Wall Street practice. Experienced brokers said they often knew about stories that publications were preparing. They noted that journalists frequently misled them about either the timing or the direction of a story. Said one broker: "We both play games."

The Journal case follows a recent flurry of SEC investigations into the misuse of confidential or insider information. Such incidents have been provoked in part by the merger wave that has been sweeping over U.S. industry: Reason: advance knowledge of a takeover bid can lead to big profits. Last January, for example, the SEC charged Paul Thayer, former Deputy Secretary of Defense and ex-chairman of the LTV Corp., with revealing to friends acquisition plans and other inside information concerning companies of which he was a director.

The agency has also been probing the misuse of information by persons other than corporate insiders. In one such case the SEC is examining records of CBS Evening News employees to see whether they invested in G.D. Searle options just before the network broadcast programs that reported Searle's NutraSweet sugar substitute might cause health problems. The CBS employees are suspected of profiting from their advance knowledge of news concerning the company.

In all, the SEC has brought over 50 suits involving insider trading in the past 21/2 years. That is more than the total number started by the agency in the preceding 47 years. Says Enforcement Director John Fedders, who heads a 591-member team: "You're going to continue to see a lot of action from us. We want the market to know that the cop is on the beat."

To make the cop tougher, the SEC is asking Congress to stiffen the penalties for illegal insider trading. Those convicted in civil cases now receive wrist-slap sanctions that merely bar them from further misuse of information and make them relinquish their profits. A House-passed version of the SEC measure would impose fines of up to three times the gains made from illicit transactions.

But Fedders and his boss, SEC Chairman John Shad, are cautious about a separate insider trading proposal before the Senate. Sponsored by New York Republican Alfonse D'Amato, it would strengthen penalties but also greatly broaden the legal definition of persons considered to be insiders. While that group is now limited to such individuals as company executives and major shareholders, the D'Amato proposal could apply to anyone from a secretary to a board chairman to a journalist who had inside information about a company. Last week Fedders warned Senators that a squabble over definitions could delay or even halt prospects for final approval of the House measure.

Though newspaper reporters at present cannot be prosecuted as insiders, the Journal's Winans, according to the paper, could be charged under statutes covering fraud and theft. --By John Greenwald.

Reported by Marcia Gauger/New York and Christopher Redman/Washington

TIME, which like the Wall Street Journal has a clear policy on conflict of interest, has had only one known case of an employee who violated the policy in 61 years of publication. In 1963, the SEC found that a former TIME business editor had bought stocks of firms shortly before articles about them appeared in the magazine.

With reporting by Marcia Gauger/New York, Christopher Redman/Washington