Fidelity rules

The Globe's blowup with the mutual-fund giant is just the latest example of the company's paranoid style of media relations

Don't Quote Me by Dan Kennedy

You'd think that one of the world's most powerful financial institutions -- managing nearly three-quarters of a trillion dollars on behalf of more than 12 million investors -- would have a pretty thick skin. But that's not the case with Fidelity Investments.

On November 12, Boston Globe financial columnists Steve Bailey and Steven Syre reported that one of Fidelity's fund managers was boosting her performance by loading up on stocks she wasn't supposed to be investing in. According to their "Boston Capital" column, Erin Sullivan, who manages Fidelity's Emerging Growth Fund, was engaging in "style drift." Translation: Sullivan was buying shares of high-performing large companies, even though her fund was supposed to be invested in midsize companies. "How do you utterly blow away your benchmark if you are a fund manager?" Bailey and Syre asked. "Answer: You cheat."

That incendiary assessment brought an equally incendiary response from Thomas Eidson, the head of Fidelity's high-turnover public-relations operation. Eidson's letter -- which Bailey and Syre reprinted in full on November 29 -- contended that the Globe got it wrong by neglecting to note that the fund's prospectus clearly states that the fund can invest in large companies. It charged that Bailey and Syre had "stepped over the boundary of provocative journalism into the realm of personal insults directed at an honest, hardworking Fidelity executive." And it demanded "a written apology to Erin Sullivan" as the price of future cooperation from Fidelity.

Bailey and Syre responded to Eidson with this pugnacious line: "You can bet we will continue covering the games at Fidelity -- even if we have been barred from the clubhouse by the team."

Of course, the mere fact that a flack and two writers aren't getting along isn't particularly newsworthy. But in Fidelity's case, Eidson's letter is emblematic of the way the company does business with the press. This blowup is just the latest in a series of incidents, going back a number of years, that stem from what might be called (to borrow political scientist Richard Hofstadter's phrase) Fidelity's paranoid style of media relations.

Numerous sources -- many of whom demanded anonymity in return for candor -- say Fidelity's first instinct when faced with tough media scrutiny is to pull up the drawbridge and make sure the alligators swimming around the corporate moat are good and hungry. If the resulting article isn't to Fidelity's liking, these same sources say, the response is to freeze out the offending reporters and, in some cases, to threaten to withdraw advertising -- a threat that Fidelity makes good on just often enough for it to be meaningful.

"I guess the best way to summarize it is that they're control freaks. They always have been," says a prominent New York-based financial journalist. "It's highly unusual to see a company in a position of that kind of preeminence be so petty and pathological about their relationship with the media."

To which a casual observer might reply: so what? Fidelity is, after all, a private company, and that gives it the latitude to treat the press pretty much as it damn well pleases. Cutting off a media critic -- by refusing interviews, canceling advertising, or both -- may be uncommon in the corporate world, but it's certainly not unheard-of. What is uncommon is for a financial-services giant to be a private company in the first place. Most such institutions are public companies that have to report to their shareholders -- through filings with the Securities and Exchange Commission -- on the full range of their operations, even the salaries of their top officers. Thus, a reporter having trouble getting information from, say, Merrill Lynch (to name one publicly held financial-services company) can do a lot of research by carefully perusing the SEC's Web site. A reporter trying to dig for information on Fidelity, by contrast, needs a cooperative relationship with the company -- or, at the least, a good mole.

Ironically, at the same time Fidelity has been earning a reputation for being difficult with the press, it has also become the press, a least in Greater Boston. During the 1990s its Fidelity Capital subsidiary has bought up struggling newspaper chains in the suburbs and turned them into the Community Newspaper Company, with more than 100 papers, nearly 400,000 readers -- and millions of dollars in losses. Though the papers consist largely of local news and advertisements, many of them also carry Fidelity-generated financial features and help-wanted ads for the Mother Ship. Several years ago, the chain raised eyebrows by running, in about a dozen of its highest-circulation papers, an editorial endorsing a Fidelity-backed $46 million state tax break for the financial-services industry. The tax break was approved.

Fidelity may be a private company, but it has a uniquely public trust. It is by far the largest mutual-fund company in the world, and it provides numerous other financial services as well, such as online discount stock trading. (I'm among its customers.) What's more, many of Fidelity's investors don't have much of a choice as to where their money goes: it ends up in the company's hands through company-sponsored 401(k) retirement plans. As Syre puts it, "Mutual funds have essentially become the trustees of America's retirement future." And Fidelity is, by far, the largest and most important of those trustees.

Despite this public responsibility, journalists describe a corporate culture in which Fidelity's chairman, Edward C. "Ned" Johnson III, acts as though he's running the same small shop founded by his father in 1946. Fortune magazine, in a memorable whack job in May 1997 (Johnson appeared on the cover with a huge HAS FIDELITY LOST IT? emblazoned across his forehead), described Fidelity as "an extraordinarily arrogant institution" whose managers are "seemingly oblivious to the idea that managing a half-trillion dollars of America's money carries with it any special need for candor."

The article also quoted Johnson as having this to say upon being introduced to a Fortune reporter: "Are you people so fucking bored that you have nothing better to write about than us?"

To be sure, not every journalist criticizes Fidelity's media relations. "I've written plenty of things about Fidelity that were tough but right, and they don't shut you off if you get it right," says Boston Herald financial columnist Beth Healy. But Healy's views are in the minority.

Fidelity's bare-knuckles approach is nothing new. According to New York Times reporter Diana Henriques's 1997 book, Fidelity's World: The Secret Life and Public Power of the Mutual Fund Giant, Fidelity responded to unflattering reporting in the early '90s by yanking the full-page ads it had run in the Times' Sunday business section for years. Fidelity denied to USA Today that the missing ads were the result of anything more nefarious than a changing ad strategy; but the ads returned after what Henriques describes as "a brief but expensive hiatus." She added that "the impression remained of a Boston bully who would cosset those who wrote flattering stories and punish those who didn't." (Henriques also wrote that, in the course of researching her book, Johnson and his top executives refused "repeated requests for interviews.")

Then there was the fallout from the aforementioned Fortune cover story from May 1997. According to several knowledgeable sources, Fidelity canceled all of its ads in Fortune after the unflattering piece appeared. The Phoenix was unable to obtain an official response from Fortune. However, the evidence would suggest that Fidelity did, indeed, exact its revenge: the company has not run a single ad in Fortune since the article appeared, after running at least six full-page ads during the first four months of 1997. Moreover, it has continued to advertise in Fortune's closest rival, Forbes, as well as in Fortune's sister publications owned by Time, Inc.

David Whitford, who cowrote the Fortune piece, says he got the cold shoulder from Fidelity, and was pointedly not invited to one of a series of regional meetings the company held to reassure jittery investors during a time when Fidelity's returns had fallen below expectations. That's standard treatment, according to sources. Business Week's Geoffrey Smith, who wrote a critical cover story in 1996, reportedly was frozen out by his Fidelity contacts for months. (Smith declined to comment.)

A number of journalists and other insiders say media loathing for Fidelity was largely responsible for the piling-on that took place in 1996 and '97, when the once-golden company was under fire for poor performance and for controversy surrounding the management of its flagship Magellan Fund. The former head of the fund, Jeff Vinik, was accused of improperly manipulating a stock price through comments in the media; he was eventually cleared, but his legacy was that fund managers were banned from talking to reporters about individual stocks. Vinik's real undoing, though, was his heavy investment in the bond market at a time when stocks were rising to unprecedented heights. Investors who thought they had put their money into growth stocks cried foul when they discovered that Vinik had gambled and lost with their money. Never mind that Vinik's colorful predecessor Peter Lynch -- now the star of Fidelity's TV and print ads -- had done exactly the same thing. Lynch, after all, won his bet.

The wounds caused by the Vinik affair were still raw when Bailey and Syre weighed in on Erin Sullivan's investment strategy. In the arcane world of high finance, it's hard to say whether they got it exactly right or not. At least one well-known financial journalist -- a frequent Fidelity critic -- believes Bailey and Syre were wrong, and as proof he cites Tom Eidson's assertion that the prospectus specifically allows Sullivan to invest in large companies. Amy Granzin, an analyst with Morningstar, says Fidelity was in the midst of repositioning the fund at the time of Bailey and Syre's column, suggesting that their criticism might have been overblown.

But Fortune's David Whitford pronounces himself unimpressed with Eidson's complaint, saying Eidson is essentially relying on the fine print in the prospectus to justify an investment strategy very different from what customers reasonably expect it to be. "It was a solid story," Whitford says of Bailey and Syre's column. "There's no question of that. The point about that fund is that it was marketed as a mid-cap fund, and she [Sullivan] was getting outstanding performance from large-cap stocks. It was a good piece of journalism by the guys at the Globe, and it was useful information for investors." As for Eidson's response, Whitford adds, "To me, that was just a classic example of Fidelity's defensiveness and Fidelity's arrogance."

Actually, in a wide-ranging telephone interview conducted earlier this week, Eidson came off as neither defensive nor arrogant. The former head of public-relations giant Hill & Knowlton, Eidson came to Fidelity as its senior vice president for corporate affairs about a year and a half ago. Some observers give him credit for professionalizing a high-turnover operation that, over the years, has been dominated more by marketing than public-relations concerns.

Not that Eidson is backing down from his dispute with Bailey and Syre. He reads from the prospectus to emphasize his point -- "Although [the fund] focuses on companies with a market capitalization of $5 billion or less, emerging growth companies can be any size" -- and insists that the Globe writers made a serious error by omitting that from their original column. "They doctored what is a legal document," Eidson says. "That's not fair."

Did Fidelity seek to punish Fortune by pulling its ads? "I've heard that kind of stuff," Eidson responds. "I hear it all the time. I think it's a little bit far-fetched. It's one of the great myths about Fidelity." A more specific response, he adds, would have to come from Stephen Cone, Fidelity's president of retail and corporate marketing. Cone could not be reached before the Phoenix's deadline.

Eidson believes Fidelity's reputation for poor media relations is a bad rap. He has a staff of 12 people handling calls from the media; last year, Fidelity received 16,000 calls from reporters seeking comment. As for the widely voiced view that Fidelity, unlike most mutual-fund companies, will not make its fund managers available to the press, Eidson responds that Fidelity managers did 500 interviews last year -- although he admits that, as a result of the pounding the company took over the Vinik affair, managers are no longer allowed to talk about individual stocks.

"We have to control access to our fund managers in a professional way. The press resents that. I don't blame them, particularly," Eidson says.

Eidson also speaks to the effects of a culture change that several journalists cite as well: the growth of mutual funds from a small, boutique industry that generally garnered glowing press into a behemoth that today draws much closer scrutiny. And Fidelity, both because it's privately held and because it's the industry leader, draws more scrutiny than anyone else. "If you're privately held, the press immediately suspects that you're hiding something," Eidson says. "This culture is about as open and hardworking and straightforward as any I've ever seen. But I think this company took a beating for a few years."

Indeed, even though Fidelity's performance has improved in 1998, these remain tough times for the company. Investors increasingly put their money into funds that robotically follow market indexes such as the Standard & Poors 500, which routinely outperform most mutual funds, including Fidelity's. Indeed, on December 16, Bailey and Syre reported (beating the Wall Street Journal by a day) that the Vanguard Group, which sells a popular S&P 500 fund, was trouncing Fidelity by a 10-to-1 margin at bringing in new money.

Eidson may be sincere about what he considers Fidelity's culture of openness. But by freezing out Bailey and Syre over what appears to be, at worst, a legitimate difference of interpretation, he has only managed to contribute to his company's reputation for paranoia. "They've always taken the approach in dealing with reporters that there's something wrong with the truth, and there's something wrong with being prompt. I don't think they serve themselves well by adopting that stance," says a former financial journalist who professes to admire the company.

Interestingly, Bailey, who's leaving "Boston Capital" and will take over Joan Vennochi's business column later this month when Vennochi moves to the op-ed page, also counts himself among Fidelity's fans. "This is a great company," he says. "It's a company I admire. Fidelity is one of the great success stories, especially in Boston." But in nearly two decades as a reporter, he says he can't recall ever having been shut off -- until now. "I've had my ups and downs with plenty of companies," he says, "but this has never happened to me before."

Adds Syre: "At this stage we're a no-comment to them across the board. But I don't think it's the end of the world not to have access."

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Dan Kennedy's work can be accessed from his Web site: http://www.shore.net/~dkennedy

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Dan Kennedy can be reached at dkennedy[a]phx.com

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Articles from July 24, 1997 & before can be accessed here

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