Don't Sell Your Readers Short in Source Disclosure

By Chris Roush
June 6, 2006

The issue that has gripped business journalism in the last couple of months is the use of short sellers as sources. It came up during the Enron trial, and it's been at the heart of the Securities and Exchange Commission subpoenas of some business reporters as part of an investigation.

The question that many outside of the journalism world, and a few inside it, are asking is whether short sellers are a good source for the business reporter. The answer is yes, but then it's how you treat that information in a story that makes the issue complicated.

Short sellers are investors who are betting that a stock price is going to fall. They borrow the stock from a broker and sell it on the market. If the stock price goes down, they repurchase the stock for the lower price, and pocket the difference as their profit. If the stock price goes up, they lose money.

Short sellers are just like any other market player, and they should be treated as such. When a business journalist interviews an analyst who has a "buy" or "outperform" rating on a stock, they tell the reader that information, and they also tell the reader whether the analyst's firm has done any investment banking business with the company in question.

The same general rules apply when using sources that own a company stock. You mention the fact that they own the stock, and state how much if you can get that information from an SEC filing or from a Bloomberg terminal.

The same rules, therefore, should apply to short sellers. If you're going to quote a source betting the stock is going to go down, then you mention in the story that they have a short position in the stock. Even if the information came from the short in an off-the-record interview, I think the reporter needs to mention that the information came from someone shorting the stock without disclosing his or her identity.

Everybody that a business journalist talks to in relation to a stock has a vested interest in how that stock performs. That vested interest needs to be disclosed.

What has been missing in the discussion of shorts as sources, I believe, is that short sellers aren't always the only ones talking negative about a stock. I've seen more than a few instances where an investor criticized the management or the performance of a company in which he or she owned stock.

Why does a source do that when the stock price could fall, hurting their performance? It's the same reason that a short talks bad about a company. They're trying to exert pressure on the company to change something, and they're using the media to convey that message.

Copyright © 2008 Donald W. Reynolds National Center for Business Journalism