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Facebook, hedge funds and bad business journalism

|Includes:, Inc. (OSTK)

On August 11, 2005, Patrick Byrne, CEO of, filed a lawsuit against Gradient Analytics, a publisher of investment research, and Rocker Partners hedge fund.

In September of 2008, Gradient settled its portion of the lawsuit. Last week, Rocker Partners also settled, paying $5-million and dropping its own countersuit.’s lawsuit was based, in part, on sworn affidavits by three former Gradient employees who described how Gradient (previously known as Camelback Research) offered hedge funds the opportunity to purchase "custom reports" on specific public companies, often comprised of information supplied by the hedge funds themselves.

According to one affidavit:

"It was common knowledge at Camelback that customers who wanted negative reports written on subject companies and who supplied negative information or guidance to Camelback in connection with a custom report on the subject companies either had short positions in the securities of these companies or intended to take short positions before publication of the reports."

The affiants specifically identified Rocker Partners hedge fund as a frequent purchaser of custom reports on, adding that David Rocker himself often edited these to portray as negatively as possible.

"The negative reports from Camelback on the subject companies were a key component in their efforts to profit from the anticipated depression of the trading price of these companies' stocks. In fact, customers, including Rocker, would ask that Camelback not disseminate the report to the public for a specific period of time so the customer could 'get their own' position in the stock before the public got the information."

All the while, Gradient failed to disclose the role its clients played in the creation of these reports, instead portraying itself as a source of independent analysis.

In response, CEO Patrick Byrne sued Rocker and Gradient, alleging unfair business practices and defamation.

In the days that followed, two types of journalism emerged.

The first camp focused on the substance of the lawsuit, in traditional “who, what, where, when and why” format.

The second camp paid little heed to the specifics of the suit, other than to dismiss it, opting instead to focus on the shortcomings of Patrick Byrne and his company (as though, if true, that would have some bearing on the legality of the scheme described in the affidavits).

Here are a few examples:

Barron’s reporter Bill Alpert called the suit “fanciful.”

Roddy Boyd, then working for Dan Colarusso at the New York Post, asked an spokesman, on the record, whether Patrick was either drunk or under psychiatric care at the time the suit was announced.

In his column on MarketWatch, Herb Greenberg, who is specifically mentioned in the suit, chalked it up to an "overactive imagination" and compared the affidavits naming him to "the writing on the walls in a public toilet."

Tim Mullaney, then of BusinessWeek, requested an email interview comprised of a litany of questions -- including "Is Patrick Byrne manic depressive? Has he ever sought care or diagnosis for any mental incapacity?" which Patrick Byrne concluded had been prepared for Mullaney by Rocker Partners or someone close to the organization. When Patrick published his responses to Mullaney's questions online, Mullaney freaked out, called one of Patrick's female assistants the worst epithet one can call a female, promising to show Patrick "exactly the same professional courtesy he has shown me!"

A few weeks later, New York Times business columnist Joe Nocera called the lawsuit "conspiracy-mongering."

In other words, there were two strikingly distinct journalistic reactions to the same lawsuit. The natural question to ask is whether there were any notable differences in the two groups of journalists themselves.

Yes, there were.

The first group was composed primarily of retail and regional business reporters.

The second group was composed primarily of Wall Street reporters.

But that’s not all.

A review of the Facebook friend lists of the members of the second group reveals that they are overwhelmingly “friends” with Marc Cohodes, a principal of Rocker Partners (and in some cases also friends with his family members).

A review of the Facebook friend lists of members of the first, more objective group reveals no such connections.

People may disagree over the significance of being Facebook versus real world friends, but two things cannot be disputed:

  1. As a former political reporter myself, I can say with complete confidence that no political reporter would ever be a Facebook friend with one of the politicians he or she is tasked with covering.
  2. The stories written by reporters linked to Rocker Partners via Facebook approached the lawsuit from a decidedly point of view.

Put those two facts together, and you get what I claim is one of the biggest problems confronting our financial system, namely, a culture that permits inappropriately close relationships among business reporters and those they cover.

In fact, I’d go so far as to say that the ethic defining American business journalism has little to distinguish it from that of sports journalism, in so far as both are dominated by boosterism and hero-worship that celebrates excesses and cringes when the time comes to ask hard questions.

There are a few exceptions, but not enough.

I believe that had business journalists regarded the heads of hedge funds and investment banks with the same degree of skepticism with which political reporters regard legislators on all levels, the current financial crisis may well have been avoided.

A meaningful, long-lasting recovery probably depends upon it.

Postscript: Incidentally, no laws were broken in the process of gathering the Facebook friend data described in this post. Indeed, Facebook stipulates that its users' friend lists are accessible by every other Facebook user. Those bloggers who claim that I’ve violated their privacy by revealing portions of their public Facebook friends lists are simply wrong and – in two of the four cases I’m aware of so far – likely embarrassed to be found connected to some of the hedge fund managers they’re frequently writing about. For additional details on these relationships, watch the video I recently published.

Disclosure: Long 16 shares of OSTK