Impropriety or Criminality?

By WILLIAM A. HENRY III

An ex-Journal reporter is indicted for stock market maneuvers

Five months ago, R. Foster Winans, a writer for the Wall Street Journal's influential stock market column, "Heard on the Street," was fired after admitting to federal investigators that he had taken improper advantage of his position. Winans confirmed that he had leaked information about upcoming column items to associates, who then profited by buying or selling stocks based on advance knowledge of the stories' likely impact on prices. At the time, Winans, 36, described his role in the scheme as "stupid" and "wrong." Last week the Justice Department contended that what he did was also criminal and brought a 61-count indictment for fraud and conspiracy against him and two alleged collaborators. The charges rely on an unusual and, to many journalists, perturbing legal theory: that Winans had a "duty" not only to his editors but to his readers to disclose his interests in the stocks he discussed.

It is a generally accepted ethical rule that journalists must not trade in stocks they report about, especially under circumstances that would allow them to profit from the effects of publicity. But the notion of an implied contract with readers is potentially so sweeping and vague that attorneys representing organizations of reporters and editors, which have all but universally condemned Winans' conduct, said they might consider taking his side if he sought to have the indictment dismissed. Argued James Clayton, co-director of the Washington-based Reporters Committee for Freedom of the Press: "There is no doubt that a reporter has an obligation to readers. The question is whether it is enforceable by the Government." A reporter who abuses his responsibilities, he added, "should be fired, not arrested."

Some legal scholars contended that the Government's case, if carried to its logical extreme, would force disclosure of the personal assets of reporters and editors. Said Floyd Abrams, whose clients include the New York Times: "The law has been clear for years. A governmentally imposed compulsion to say something in a newspaper is an unconstitutional price for exercising First Amendment rights." But Michael Missal, a lawyer for the Securities and Exchange Commission, said, "We don't expect every journalist to disclose all financial relationships." Instead, he explained, the Government's case is aimed specifically at efforts to grab quick profits triggered by foreknowledge of a particular story. A similar case, under investigation by the SEC, involves several CBS employees who allegedly exploited awareness of an upcoming negative story on the commercial sugar substitute NutraSweet by engaging in transactions that presupposed there would be a drop in the stock price of the manufacturer, G.D. Searle Co.

When the story of Winans' improprieties broke in March, co-workers suggested that he might have been the dupe of sophisticated traders and investment analysts whom he interviewed for his column. But in May the SEC charged in a civil suit that two stockbrokers who shared in the scheme, David Brant and Kenneth Felis, both then employed by Kidder Peabody, paid Winans $31,000 disguised as interior-decoration fees to his New York City roommate, David Carpenter. Last week's indictment charges that in the first half of 1983, before any arrangement with the brokers, Winans and Carpenter on their own speculated on stocks about to be mentioned in the column. They made a profit of $2,859.47 on an investment of $1,814.17 in American Surgery Centers Corp. and another of $497.59 on a $1,237.50 purchase of Institutional Investors Corp.

In contrast to these modest sums, the later scheme allegedly reaped almost $700,000 in net profits. Brant pleaded guilty to conspiracy and fraud in July, agreeing to pay a penalty of about $450,000 in profits, to give up the securities business permanently, and to cooperate in the prosecution of Winans, Carpenter and Felis. He was not included in last week's indictment, and is expected to be a prosecution witness. But a substantial question remains as to how valid the case will be. Officials of the Journal, which has been bitterly critical of Winans and the alleged plot, said last week that the paper may go to court to debate the indictment on constitutional grounds. The accused men took a more extreme version of the same position: whatever the morality of their actions, they were not illegal. Said Don Buchwald, attorney for Winans and Carpenter: "Our advice to our clients is that their actions are not violations."

--By William A. Henry III