We’ve just begun to see the fallout from Bloombgerg LP that, in the word of CEO Dan Doctoroff, “Bloomberg News reporters had access to limited customer relationship management data through their use of the Bloomberg terminal.” In blunter words, Bloomberg reporters were using their access to terminal log information to spy on customers’ activities. Considering that Bloomberg’s customers are the titans of Wall St. and government and that they are typically paying $20,000 per terminal per year, I expect the consequences to be nasty.
But the issues go well beyond Bloomberg. The internet, and society in general, operates as a network of trust that demands that certain lines never be crossed. Email providers have access, at a minimum, of extensive information on who you are exchanging mail with and often to the contents of the messages as well; you assume, without even thinking about it, that your email host is not selling the information to your competitors. You mobile phone service also has extensive records about both who you have called and where you have been. You assume these records also stay private. Bloomberg crossed that line. There are good technical reasons why the company–or any service provider–needs to collect log data that can reveal a good bit about client activity. And there are good legal and ethical reasons why that information must remain tightly restricted.
Breaches have, of course, occurred in the past. When I worked for BusinessWeek, we had a leak of market-moving information. employees of one of our printers were selling advance copies of an Wall Street column to traders. It turned out that one editorial employee was using the same information to trade on his own; both the printers and the editor went to jail. The electronics age makes this sort of thing both easier to do and harder to stop.
What remains to be seen in the Bloomberg case is just how widespread the practice was, exactly what information reporters had access to, what senior executives knew about it, and how long it went on. The initial damage will be to Bloomberg, but this episode (along with mounting reports of extensive government snooping on citizens) further weakens the delicate fabric of trust that lets the economy and society work.
“What remains to be seen in the Bloomberg case” … is just how the SEC will examine the inherent conflict of interest when employees of Bloomberg LP engage in activity that serves self interest for all involved. Regardless if its Bloomberg journalists accessing private and sensitive market and financial data secured by Bloomberg data systems, or if its Bloomberg employees riding the revolving door into NYC public office (and back again) at the behest of Mayor Bloomberg, it carries a perception of insider activity. Is there a problem emanating from the Bloombergplex … Bloomberg LP, NYC, and Bloomberg himself?
I’m not sure there’s an SEC issue here unless there is evidence of insider trading. There’s a big issue of journalistic ethics, but fortunately the SEC doesn’t regulate that. There may well be a contractual issue between Bloomberg and its customers. I’m not sure what else.
By the way, based on what has been disclosed, there is not allegation of improper access to to private financial information or trading data, just basic log stuff. Now as any intelligence analyst will tell you, you can learn a lot from traffic analysis, and that is basically what the Bloomberg reporters had access to. But it is important to understand what is and is not being charged here.
I understand that there was no detailed information accessible by reporters. However, the shortfall in ethics raises questions about the organization and the practices of those with greater access. The question regarding insider activity can only be answered by an organization like the SEC which has law enforcement investigatory authority to examine what is supposed to be closely held information. Did the reporters see enough private information which could tip traders as to specific developments? Apparently, Goldman Sachs and JPMorgan Chase & Co thought so. If they, the foxes guarding the hen house, express concern, then it sounds like time for the SEC to examine the issue and under the best circumstance place investor unease to rest.
I’m sure they will look into it. The key to insider trading, though, is not having the information but trading on it. Reporters are in possession of inside information much of the time. In the tech industry, reporters (and analysts) are often briefed on product announcements before they are made public, usually under a non-disclosure agreement. You have to know the rules and abide by them.
Agree, the Supreme Court was sensitive to the distinction regarding insider activity between analysts and other parties in DIRKS v. SEC, 463 U.S. 646 (1983). The SEC went after Dirks even though he did not trade on information on the basis that he was providing Tips to others who did (or may have) trade(d) and that he had a fiduciary duty to refrain from sharing that information. SCOTUS ruled that in doing so, Dirks had no fiduciary duty to refrain from sharing the insider information and thus ruled against SEC. SCOTUS held that the action of analysts is beneficial to the market, is based on insider information, and has to be balanced against the nature of their activity based on insider information and any fiduciary duty that may derive from those activities.
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