Thoughts on CrunchFund for my Digital Media Law Course
I thought I’d share a recent opinion paper that I wrote for the Law class I’m taking with Kraig Baker in the MCDM program this quarter. There’s no shortage of issues to dissect when considering the impact of digital media on law. In this first class assignment, I discuss the controversy around the launch of CrunchFund, an early stage venture capital firm founded by TechCrunch founder and co-editor Michael Arrington, Patrick Gallagher, and MG Siegler. Admittedly, the paper is lengthy and lighter on policy than it should have been, but it was a fascinating topic to research: when can a blogger refuse the title of journalist and is the disclosure of material connections “ethical enough” for the digital age?
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“Look, the real crime is that journalists don’t run their own tech companies. Hell, it would save journalism.”
– Zennie Abraham, contributor to the San Francisco Chronicle and host of The Blog Report
Abraham’s zinger concluded a rebuttal to Venture Beat editor Ben Popper’s criticism of CrunchFund, an AOL-baked investment fund founded by TechCrunch founder Michael Arrington. Writing this post after observing an hostile Tweet exchange between Arrington and Popper, Abraham made the point that all journalists write from a biased point of view. Abraham sought to dismiss claims of wrongdoing against Arrington.
CrunchFund’s announcement raises a number of questions about the current state of journalism and the impact of the blogosphere. Specifically, is disclosure of “material connections” enough to legitimize blog coverage of of a news event, particularly in the field of tech investments? Generally, at a time when bloggers vie for the protection afforded by journalist shield laws, can a prominent blogger refuse the title of “journalist”? How will future legislation articulate the boundary between opinion and editorial and how will these decisions impact the relationships between tech bloggers, investors and private technology firms?
The functional question that I’d like to help answer is thus: As a lawmaker, should one pursue firmer (i.e. moving from FTC guidelines to laws) regulations that would prevent tech bloggers (even those who disclose) from covering companies in which they are personally invested?
Background
The launch of CrunchFund on September 1, 2011 brought to a head the apprehension of Michael Arrington’s dual role as a major Silicon Valley investor and prominent tech blogger. CrunchFund is an angel fund launched by Arrington and backed AOL meant to capitalize on the expertise Arrington created for himself through TechCrunch, but not necessarily related directly to the online publication.
Arrington founded TechCrunch in 2005 as a personal blog chronicling the news and development of startups in Silicon Valley. By 2007, Arrington had assembled a paid editorial team of bloggers and a CEO to guide TechCrunch as its traffic and influence grew. Around this time, Wired magazine profiled the “mouthy” Arrington as a kingmaker of the new Silicon Valley startup scene, “a power broker… to entrepreneurs in the white hot consumer Internet boom – known as Web 2.0” (Vogelstein 2007). As his influence grow, so too did his inclination to use his influence to support his friends and destroy his enemies, as countless Tweets, status updates and blog posts document. For instance, BusinessWeek notes that Arrington warned of a declaration of “war” if another startup up hired away one of his employees. (Gillette 2011) As he left a business conference in Germany, a stranger walked up and spat in his face, prompting Arrington to lash out that the culprit was likely a frustrated European entrepreneur who didn’t receive the coverage from TechCrunch for which he was hoping. (Gillette 2011) In 2009, a former writer filed a libel suit against Arrington, accusing him of character assassination. The judge ruled in the writer’s favor after Arrington did not show up for his court appearance. (Gillette 2011)
From early on, Arrington had faced criticism about playing both the roles of a tech blogger and Silicon Valley power broker. Bolstered by a ruthless personality, Arrington acknowledged his unique position, but dismissed this conflict a “false dilemma” and claimed on his blog, “ I strive to be fair and say only what I believe the truth to be. But that’s where it ends.” (Vogelstien 2007) Yet in 2009, shortly before his hearing in the U.K., Arrington announced that he would no longer invest in startups because ‘competitors and disgruntled entrepreneurs’ were using conflict-of-interest accusations ‘to attack our credibility.’”
A year later, CEO Tim Armstrong announced that AOL had purchased TechCrunch and Arrington announced his intentions to stay with AOL for a “very, very long time.” Likely with the cash he earned through the acquisition, Arrington resumed investing in May of 2011 with, what many viewed as, AOL’s awkward and borderline unethical blessing.
The launch of CrunchFund elicited strong response from media critics and tech journalists who were concerned about Arrington’s conflicts of interest. David Carr at the New York Times observed the move was “comically over the line” and that “the coverage of technology has spawned many innovations in the news business, but now it seems to be the source of a particularly problematic one.” (2011) Carr went on to claim that, with CrunchFund, Arrington “will now use the luster of a journalistic brand to enhance his new capital venture.” (2011) Kara Swisher at All Things D had an equally alarmist, if not vitriolic, response to the news, calling it “business as usual in Silicon Valley” and a “giant, greedy, Silicon Valley pig pile”. (2011)
Fellow TechCrunch writers and Silicon Valley investors, many of who wrote publicly or contributed to some form of media enterprise, came to Arrington’s defense. Prominent investment writers and fellow VCs from funds like Union Square Ventures and Spark Capital dismissed the criticism and instead labeled it a “hatchet job.” TechCrunch’s Paul Carr and M.G. Sielger echoed what was AOL original party line that “TechCrunch is a different property and have different standards,” allowing them to report on potential conflicts of interest so long as those conflicts are “disclosed and transparent”. (Carr 2011)
Arianna Huffington responded to the PR fiasco by stripping Arrington of any paid editorial oversight but somehow still allowing him to contribute to TechCrunch, though Arrington eventually left to focus his time and attention on CrunchFund.
While much of the original criticism tossed back and forth between tech journalists and the investor community centered around the journalistic pledge to uphold ethics and standards, it was the exchange between VentureBeat’s Popper and Arrington on Twitter mentioned above that most prominently raised the proposition of legal ramifications. Arrington argued that his work on TechCrunch was protected by the first amendment. Others cited the risk of violating SEC regulations. Yet, according to FTC guidelines, so long as Arrington was clearly disclosing his relationships, he was free to write about any startup he wished.
“@arrington: Screw that. Let me introduce you to the first fucking amendment to our constitution.”
Arrington “rejects the title of journalist” (Jarvis 2011). As mentioned above, in his 2007 Wired profile, Arrington claimed, “I strive to be fair and say only what I believe the truth to be. But that’s where it ends.” Arrington maintains that TechCrunch was launched not as a journalistic venture, but as a means of gathering information about up and coming startups and as a soapbox to promote himself as an investor. “He is returning to his roots” in launching CrunchFund, says Jeff Jarvis on BuzzMachine (2011). Regardless of how he identifies himself, does the fact that Arrington commits “acts of journalism” (as Jarvis articulates) qualify him to be protected under the first amendment as he so colorfully suggests in his Tweet above? The answer is a tricky one.
To begin, it becomes challenging to invoke Rule 10b-5 of the Securities and Exchange act (as Popper did) to accuse investors of fraud through omission. “Otherwise it would be impossible for anyone to write about companies without attaching a full prospectus to every post,” notes John Coffee of Columbia University who spoke with Popper for BetaBeat. As for precedent? Denise Howell, an attorney with appellate and technology expertise interview by Adario Strange on her blog Z3N, suggests that Arrington’s First Amendment claim may not be so unreasonable. “TechCrunch would certainly be the first to call its writers bloggers as opposed to traditional media,” say Howell. Likely what gives Arrington confidence in his First Amendment claim is the U.S. Supreme Court decision in the 1974 Miami Herald v. Tornillo case, stating that it violates the first amendment for a government agent to “interfere with newspapers’ editorial control or judgment (2011). In 2010, in an effort to clarify rules in the changing media landscape, the FTC published guidelines requiring bloggers to make known any “material connections” they have with companies that they are endorsing. But, as Howell points out, “many have challenged the guidelines… for ignoring the Tornillo reasoning and discriminating between forms of media.” (Strange 2011) Ultimately, where opinion stops and journalism begins remains unclear in a legal grey area with no obvious case precedent that clarifies the relationship between the FTC rules and first amendment decisions.
All for naught, Arrington consistently discloses his ties to companies that appears in TechCrunch’s coverage and claims to hold higher standards of transparency for the industry. Indeed, Arrington’s investor-blogger position did not appear as indefensible once it was revealed that traditional news outlets (especially ones critical of Arrington) like the New York Times and Bloomberg News also had investments that evoked similar conflicts of interest. Yet, as the NYT’s David Carr – who himself was undoubtedly thrown into an awkward position when the news of his employer’s investments broke – reported that Arrington “argues that his investments would produce less of a conflict of than the other conflicts of interest that all journalists have human beings.” (2011) The argument really rests on the fact that, ultimately, all journalists, especially bloggers, write through emotion while trying to make it appear unbiased.
Acknowledging this truth, Arrington may appear to be the most lawful, or at least “honest,” of the lot in this new and evolving media landscape. Arrington believes that he has a popular site because “we have built reader trust.” “Like the capitalist that he is,” noted Wired’s Fred Vogelstein, “Arrington trusts the market to reward or punish him as it sees fit.“ (2007)
“@benpopper: You’re still at risk of violating SEC rules”
“People think there is a distinction between how a major investor can talk about a public company versus a private company,” says Ralph Ferrara, former General Counsel for the SEC, who spoke with Popper after CrunchFund was announced. But, “everything that you can do wrong when combining a public company with the media applies to investments in private companies as well.” The particular SEC Rule to which Ferrera refers is Rule 10b-5 of the Securities and Exchange Act of 1934:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
- a. To employ any device, scheme, or artifice to defraud,
- b. To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
- c. To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security. [link to Security Lawyer’s Deskbook]
To this end, in review of startup coverage and disclosure announcements, TechCrunch has a track record of favorably reviewing companies in which Arrington has disclosed he has a personal investment. While TechCrunch’s coverage may not be able to make or break all startups, it does carry significant influence and ability to expose them to an audience of angel investors hungry to invest in the next Facebook. The New York Times’ David Carr casually cites four examples alone of startups launched by Silicon Valley insiders that received generally positive product reviews by the TechCrunch staff shortly before disclosing that Arrington had a stake in their companies. (2011)
Furthermore, anecdotes have shed light on Arrington’s reported brazen and upfront attitudes about his “pay for the play” approach to tech blogging. Carr also reported that, at an event for venture capitalists in 2011, Arrington “announced that those who provided TechCrunch with scoops, the coin of the realm, could expect good treatment on lesser stories. Those who did not, he said, would be ignored.” (2011) While Arrington may refuse the title of journalist, he certainly does not dispute taking part in the “you scratch my back, I’ll scratch yours” culture of the Valley.
While the launch of CrunchFund effectively moves him further away from journalism, it places him squarely in the role of a VC and reeks of the “insider trading” that is unfortunately all to common among investors and tech bloggers. As Edward Wasserman, professor of journalism ethics at Washington and Lee, told Clare Cain Miller at the New York Times, “If it’s helping a group of investors make decisions or advancing one’s own portfolio, you’re not really in the journalism business. You’re in the private enrichment business.” (2011) The question remained: if he continued at TechCrunch, should Arrington have been held to the same journalistic ethics and removed from coverage of personally invested companies?
He may reject the journalist title, but, as Jeff Jarvis points out, Arrington has “created a media entity along the way” while gathering information about startups and promoting himself as an investor. Insisting that he is not a journalist does not mean that he has not regularly committed acts of journalism that influence readers’ investment decisions. While the boundaries of journalism have certainly blurred in the era of blogs, Arrington’s acts of journalism should still be held accountable according to SEC regulations if investors do feel they were willfully deceived or mislead into a misrepresented investment.
Summary
Despite what AOL’s CEO may claim, tech journalists and bloggers should not be held to different standards than other media entities. Yet the only solution to hope for here is that industry outcry over ethics eventually snuffs out these situations, which, in the case of TechCrunch and CrunchFund, it did. Arrington was right to abandon his paid editorial oversight at TechCrunch to focus on the investment firm in order to avoid general conflicts of interest and skirting the law.
In regards to cementing the guidelines of the FTC and pursuing clearer legislation concerning investor fraud in the era of blogs, I recommend opposing such propositions. An ever-fragmenting media landscape, in which there are limitless sources of information, people, be they consumers of packaged goods or tech investors, must self-educate themselves and view all media coverage with skepticism—no more than ever. Internet users must not “believe everything that they breathe” as musician Beck once said. This carries even more significance for investors who seek advice on where to move large sums of money. More severe government interference with “bloggers” who clearly disclose their material connections will only lead to increased discriminatory regulation of online communications and the infringement of first amendment rights.
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Wow, if you made it this far, thanks for taking them time to read some bloke’s grad paper!
