I thought that was kind of interesting. But the issue was that it was a theory and there were no actual cases of it. We called around to a few people and no one believed it was true. In fact, the guy was actually having trouble getting the paper published because of that very thing. Essentially what he was saying was there’s massive fraud going on inside corporate America that no one’s discovered, and basing that on statistical evidence from the database.
About two weeks after that initial conversation, I saw that the SEC actually brought a case about something that looked similar against a company in California. I thought, “Wait a minute. Maybe there is something.”
So I jumped in and worked with the reporters on a small story that day. And then I did a page-one story about how the SEC had been looking in this area in a somewhat limited way. But no one seemed to pay the slightest attention. There were no follow-up stories, as far as I could tell. I decided there’s got to be more of these companies out there.
I was talking with James Bandler, who worked for me at the time about going into this stuff, and Charles Forelle, who worked in the Boston office but in a different unit, was a mathematical type. He was sort of wandering by this hallway conversation and said “Why don’t you do something about probability of these people getting their options on particularly favorable dates?” That’s essentially how the project was born. I had the idea and Charles had the mathematical approach to it and James did a lot of digging.
We published the first article, which said this is so highly improbable that the only explanation would be backdating. We didn’t actually accuse anybody of doing anything illegal, we were very careful. But when you’re talking about billions-to-one odds, it seems likely.
There was silence for a while. And then a couple of companies announced internal investigations, and Wall Street research firms started doing their own analyses of different companies using a slightly different statistical approach.
TA: Was it frustrating to you—I can remember the pushback, including by the editorial page of the Journal itself, saying “Well, this isn’t fraud.” I think most people were shocked and thought this stuff was fraud, but was this something you had to take into account in subsequent stories?
MM: It’s always tricky when you’re in a high-profile type of investigative situation and you get pushback, but the paper stood behind us and it was clear that it was right. People were getting fired and companies were admitting it. It became quickly obvious that there were hundreds of companies that had done this.
The editorial page has got its own opinion, and they’ve got a right to their opinion. I think it’s delusional to think that these executives didn’t know that what they were doing was wrong. They clearly did in 90 percent of the cases at least. But they thought they could get away with it, and for a long time they did.
The editorial page’s argument was that the accounting rule was silly and therefore violating it wasn’t really that serious. But you can’t have people going around making up their own accounting rules. “I don’t like this rule; I’m going to ignore it.” It’s just a recipe for chaos. It’s a completely nonsensical approach. If you don’t like the accounting rule then lobby to change it, but don’t not like it, violate it, and then pretend it was okay.
TA: A broader question: What’s the climate for investigative reporting in general? Do you sense it’s getting more difficult or there’s less ability to do investigative reporting on corporations with all the cutbacks?
MM: (Everybody) knows that to do investigative reporting is somewhat expensive and people-intensive, time-intensive.
So far I’ve been blessed with editors that understood that and understood that sometimes it’s going to take weeks and sometimes months. My contention is what is it that people remember every year? They read something really great in the newspaper or magazine and maybe they’ll resubscribe.
It’s just a question of balance and how much time should people be allowed and how much expense is it. There also has to be a recognition on the part of management that you’ve got to drill some dry holes when you’re prospecting for oil.
Fortunately, at some of the bigger newspaper and magazines there’s still some pretty good investigative journalism going on, but my sense is there’s less of it. There’s pressures to just cut some of that and it’s something the reader doesn’t know they’re missing necessarily until they don’t get it.