Think of all the ways you can finance investigative journalism. There’s advertising, subscription fees or donations. Now you can add a new fundraising strategy to the mix: wagering that the companies you investigate will go under because of your findings.
San Diego’s Barry Minkow, the scamster-turned-fraud-detector whom I interviewed late last year, and former Los Angeles Times religion reporter Bill Lobdell are adopting this approach, in part, to fund their new journalism website, iBusiness Reporting. It’s devoted to exposing corporate swindlers.
“It’s admittedly unorthodox: a journalist and a former con man team up to open an online news operation that’s funded by short selling,” Lobdell says on the website.
As the Los Angeles Times puts it in a story published Wednesday, “they will short-sell many of the companies they investigate, in effect betting that they can drive stock prices down, simultaneously pushing iBusinessreporting’s bottom line up.”
Minkow became a national celebrity in the late 1980s as a young “whiz kid” who lured people to invest tens of millions of dollars in his carpet-cleaning business. His $300 million empire collapsed when it was exposed as a giant Ponzi scheme, and Minkow spent seven years in prison.
He has since tried to rehabilitate himself. In addition to serving as the senior pastor of an evangelical church based in a local business park, Minkow runs the San Diego-based Fraud Discovery Institute, which will fund the journalism website.
The for-profit institute, which aims to detect corporate fraud, makes money in part by betting that the public companies it investigates will tank.
It has made the news several times, including just a few weeks ago when Dow Jones Newswires reported on Jan. 25 that the stock of the dieting company Medifast “is off 38% in 2010 as controversial fraud crusader Barry Minkow reiterated his assertion that Medifast is a pyramid scheme. Medifast has responded that the claims are fraudulent, calling them ‘outright, deliberate, and possibly illegal market manipulation.’”
The institute engages in “short-selling.” That’s essentially a wager that a company’s stock will collapse — borrowing shares at one price, and hoping to repay them at a lower price. You lose money if the shares you borrow increase in value.
This approach is legal, Minkow said, “as long as you disclose it.”
But is it ethical? As James Rainey of the LAT puts it:
[T]he newfangled business model flies in the face of traditional journalism’s conflict of interest codes. At most major news outlets, including this one, reporters can’t own stock in industries they cover. Rules often forbid speculation and short-selling stocks under the theory that those practices would give journalists incentive to accentuate a company’s negatives.
But Lobdell said that readers will know, from the get-go, if his outlet has a business interest in a stock crashing. And they will be able to judge his work with Minkow accordingly.
The first story on the iBusiness Reporting website questions a Houston-based oil company that, it says, hasn’t turned a profit or found commercial gas or oil in seven years of exploration of Papua New Guinea, but “has discovered another type of resource that’s brought the company hundreds of millions of dollars: the press release.”
— RANDY DOTINGA