UPDATED 11:30 EDT / APRIL 28 2011

AOL’s Techcrunch Editor Discloses Investments, Admits to Conflicts Of interests

He said he had refrained from making investments in startups since 2009 because of distracting accusations of conflicts of interest but that he had recently changed that policy (following the sale of Techcrunch to AOL).

Over the last several months I have begun investing actively again. We’ve noted these investments in Shawn Fanning’s new startup and in Kevin Rose’s new startup.

I have also become a limited partner in two venture funds, Benchmark Capital and SoftTech VC. I am considering investments in a few other venture funds and a couple of startups as well, but have nothing further to announce yet.

He says he is OK with having financial conflicts of interests in his reporting:

There’s a very good chance that I’ll be a direct or indirect investor in a lot of the new startups in Silicon Valley, and that will mean that there will be financial conflicts of interests in a lot of my stories. Either because I write about those companies, or write about a competitor, or don’t write about a competitor.

It’s certainly a fresh approach to the issue of financial conflicts of interests: that as long as it’s disclosed, it is OK.

When I was at the Financial Times we were barred from investing in any companies in our beat sectors. Even a mutual fund with investments in our industry could spell trouble.

Kara Swisher, ex-Wall Street Journal and now editor of All Things Digital, a Techcrunch competitor, has a very strict ethics code. It is based on the Dow Jones ethics code, which does not allow any reporter to invest in companies in their industry beat, and this ban extends to members of their immediate family.

Here is a recent interview with Ms. Swisher at Two Bananas Marketing, “Influence, Reputation, and Ethics in the Social Arena,” in which she talks about the importance of ethics in her reporting, and even the importance of disclosing that her partner works at Google.

Foremski’s Take:

Does the simple act of disclosure make things right? Mr. Arrington believes that as long as everything is disclosed then readers can make up their own minds if he is influenced in his reporting by his financial interests.

But disclosure statements have to be found and read, they don’t accompany each story a journalist writes, or make it clear the many different ways that a financial conflict of interest might be present.

It’s best to have a blanket policy of no investments allowed. That way readers can read the news without having to do the leg work to figure out if there is any bias.

Also, Mr. Arrington does not explain why his no investments policy was the right one in 2009, but now it’s wrong. What changed? The fact that he now has money to invest from his sale of Techcrunch?

It’ll be interesting to see if there is a price to pay. Will All Things D, with its strict ethics policy, triumph over Techcrunch with its “like it or lump it” approach to allowing investments in companies it covers?

The Techcrunch policy could backfire in several ways:

– Startups might grow to distrust Techcrunch reporters and hold back on key information because it might be fed to competitors in which they have a financial interest. Or they might be afraid to be represented in a bad light to boost startups financially favored by the reporters. Bad press can kill a startup.

– Techcrunch reporters might try to please their boss and skew their coverage to curry favor and seek promotions.

– Readers might grow to mistrust Techcrunch and switch their allegiance. If that happens then the cost of its lax ethics policy will be a very expensive one.

I wonder what AOL’s ethics policy is for its media properties? I’m sure it must have one. Arianna Huffington is Mr Arrington’s boss and I’d be surprised if she would allow investments by AOL editors.

Or maybe Mr. Arrington is deliberately seeking an earlier exit from his job?

[Cross-posted at Silicon Valley Watcher]

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