Pulitzer’s Gold: A Century of Public Service Journalism, revised and updated edition

Returning in 2007 to the one-winner-per-year norm for public service, the Pulitzer Prizes honored the Wall Street Journal with its first gold medal, for reporting on the corporate abuse of executive stock-option incentives. And in 2008 the Washington Post earned its fourth, for exposing shameful conditions at Walter Reed Army Hospital, which housed injured veterans home from the wars in Iraq and Afghanistan.

The work that led to the Journal’s award began to take shape late in 2005, after Boston investigative team leader Mark Maremont had his attention called to the strange games being played by some companies in setting the options, “strike price”—the price at which executives are entitled to buy shares when the terms of their grants allow it. In most cases, the strike price is the quoted value of the stock on the day the company’s board of directors approves the options. Such a design provides a fair corporate baseline to use in rating the performance of individual executives over time. All within a week, reporter Maremont was tipped to some peculiar legal disclosures being made by a handful of companies in Securities and Exchange Commission (SEC) filings and also to the existence of academic research focusing on unusual stock-option timing issues.

At first he had trouble understanding the filings. There was almost certainly hanky-panky in the corporate accounting for stock options at some companies, but Maremont wasn’t sure exactly what was being masked by the bookkeeping. As for the academic research, the tipster had pointed the reporter to a study by University of Iowa professor Eric Lie, who thought that low-strike price patterns might reflect companies using hindsight to identify historical lows and then to set their strike prices after the fact. Maremont found other academic research, including an eight-year-old study by David Yermack at New York University’s Stern School of Business, suggesting that companies may have manipulated strike prices by controlling the release of news to depress the quote on the day in question.

As October 2005 ended, the picture got clearer. “One of the companies I’d been looking at fired its top three executives and said they’d been doing funny things with stock-option dating,” Maremont recalls. An article that he prepared with two other reporters appeared on November 3 on page seven, mainly discussing the problems at Mountain View, California, software maker Mercury Interactive Corporation. It was a typical Journal collaboration between reporters from its news bureaus. While two other staffers had closer contact with the company involved, Maremont brought his recent familiarity with the backdating issue to the story. A week later, he wrote his own article. It began: “Federal regulators and academics, scrutinizing a broad pattern of well-timed stock-option grants, are exploring the extent to which companies improperly backdated grants to provide insiders an extra pay windfall.”¹ Maremont again focused on Mercury, which admitted to backdating in SEC filings and acknowledged that it had been improper. Noting the academic research at Iowa and NYU, his article mentioned several other companies that had disclosed that they were being investigated by the SEC. The story ran on page one as an “extra,” a term the Journal used for a major news article each day that is elevated to run on the first page. (The Journal’s front page was dominated most days by three feature stories that were its signature attractions: two “leaders,” its main magazine-style features, and the “A-head,” so named because of the shape of the hood that appears above the italic headline type. Headlines of leaders were often topped with snappy, boldface “flash lines.”) The decision to include the backdating story on the front page was made at the previous day’s New York national news meeting, where the final call belonged to managing editor Paul Steiger.

With Maremont’s story airing the academic work on backdating for the first time in the general press, he expected others in the media to pick up on the phenomenon. He was wrong. “I’m not sure why exactly,” says the reporter, “but the story didn’t really gain any traction.” Indeed, he can’t remember competitors publishing a single word about the backdating. Why did other papers not follow the Journal? Competitive pride may have played a part. Even among editors at the archrival New York Times, Maremont speculates, there may have been a hands-off attitude: “Somebody else had gotten it, and they weren’t going to pay any attention.” Journalists also might have thought the problem was limited to a few obscure technology companies. Finally, it was possible that—even after following the blatant criminality of the Enron Corporation scandal six years earlier—reporters found it hard to believe that corporate executives would secretly game the system to increase the haul for themselves and their compatriots.

Charles Forelle had an idea. Talking with Maremont in the hallway one day, the young math graduate suggested that the paper do its own probability analysis to determine the odds of these historically low stock prices being accidentally chosen. Maremont liked the approach and asked Bandler and Forelle to work together on a formula that used data from daily electronic stock-trading charts, applying it to companies suspected of strike-price manipulation. Because the algorithm being used was the Journal’s own, the team members knew that extreme care had to be taken in their research. “Essentially, what we were doing was accusing these companies of improper or even illegal behavior on the basis of stock charts and our own mathematical analysis,” Maremont notes. “There were no Deep Throats here,” he says, referring to the famous anonymous source consulted by the Washington Post’s Bob Woodward in pursuing the Watergate stories in 1972. And no governmental or corporate leakers had offered accounts that could backstop them if they were wrong. The reporters were on their own.

In the Journal’s centralized national editing system, largely unchanged since legendary editor Bernard Kilgore designed it in the 1940s, bureau chiefs or team leaders were responsible for proposing front-page projects to the editing staff in New York and then for delivering the articles. When submitted, the stories went into a backlog of page-one candidates to be processed for publication. Managing editor Steiger and his deputies—for the backdating stories the key deputy was Pulitzer-winner Daniel Hertzberg—had overall authority for when and how the stories would be presented. The basic editing of feature articles after they flowed into New York, however, was in the hands of a special page-one staff headed by Michael Miller. Veteran editor Dan Kelly was assigned to work with the backdating story and successive feature articles on that theme.

The article finally put backdating on the national journalistic map, even if the Journal retained a huge head start in covering the topic. Staying out front, Maremont’s investigative team wrote more feature articles, and the news stories were frequently positioned as page-one extras. Managing editor Steiger “was very much in favor of keeping up the drumbeat of coverage,” says Maremont. Later stories showed how companies backdated options as a way of cutting executives’ taxes and demonstrated that the stock market’s post-9/11 plunge had provided corporate backdaters with cover for their schemes.

Maremont and editor Dan Kelly agreed that not much needed to be written about backdating’s legal status. Whether criminal or not, the activity would clearly be seen as deceptive by readers, the two men believed. And the value of any stock that was not fairly earned should have belonged to all the shareholders.³ The Journal focused more on explaining how companies had originally intended stock-option mechanisms to provide a more equitable, performance-based incentive system and how backdating distorted that design. (Later, when the federal government pursued cases of backdating-related securities fraud, tax fraud, and other offenses—many against companies that had been cited in Journal stories—officials detailed the lawbreaking involved. In its case against Mercury Interactive, for example, the SEC alleged that former senior officers “perpetrated a fraudulent and deceptive scheme from 1997 to 2005 to award themselves and other employees undisclosed, secret compensation by backdating stock option grants, failing to record hundreds of millions of dollars of compensation expense, and falsifying documents to further the scheme.” The government was litigating cases against four former Mercury executives. But the $28 million corporate penalty that Mercury paid, according to SEC chairman Christopher Cox, “should send a clear signal that fraudulent stock option backdating and other financial fraud will be severely punished.”)

At first, the Jenkins columns infuriated Maremont, although the reporter eventually found them almost comical. A logical extension of Jenkins’s argument seemed to be that executives should be free to ignore an accounting rule if they disagreed with it. “That strikes me as a recipe for chaos,” says Maremont, “and something that the editorial page should have repudiated, not welcomed.” Reflecting on the interoffice conflict, though, he soon saw the Jenkins columns as “a net positive, because being attacked by the paper’s far-right editorial page was seen in most of the media world as a badge of honor and a sign that the scandal had really hit a nerve in the plutocratic class.”

Jenkins’s criticisms were the exception, and most Journal reporters and editors took pride in the groundbreaking coverage. In the spring, the Dow Jones board of directors asked Maremont to make a presentation and discuss the stock-option scandals. When one board member asked how many companies Maremont thought might eventually be tarred with the backdating brush, the reporter estimated thirty or forty. “Of course, I was wildly underestimating the scale of the scandal at that point,” he says now. (Asked whether Dow Jones itself was ever suspected of such abuses, he laughs. “As a recipient of Dow Jones stock options, I can assure you there was never any backdating,” says Maremont. Indeed, “they kept granting them at a high point.”)

After being selected as a finalist by the Pulitzer public service jury, the Journal’s entry was forwarded to the full Pulitzer board, which happened to be chaired by Journal managing editor Steiger that year, his final one both on the board and as the newspaper’s managing editor. That made the gold medal—voted while Steiger was out of the room—especially precious.

“I believe one of our highest callings as a news organization is to unearth the ills of business so that society can fix them,” Steiger said in a memo to the staff. “The exposure of the pernicious disease of options backdating was a particularly dramatic example of just that.” The Journal’s reports led to federal investigations targeting 140 companies and calls for regulatory reforms. More than seventy executives lost their jobs. And with a second 2007 Pulitzer, for international reporting, the 118-year-old Journal added to a winning tradition that included twenty-five Pulitzers since 1980—an average of nearly one per year.⁵

Since the winning of the prize, Maremont and Steiger agree, stock-option offenses faded as a target of regulators. “Enforcement petered out because there were lots of bigger fish to fry,” says Steiger, including issues related to the nation’s financial meltdown. But the stock-option stories carried a powerful message “that somebody’s watching,” he adds. “When you’re privileged in society, as business executives are, it’s even more incumbent upon you to play by the rules.”⁶ Indeed, one of Steiger’s favorite tests of ethical behavior had played out, quite literally: “How would this look on the front page of the Wall Street Journal?”

At most papers, editors make the call on who will team with whom. But as the top Washington Post investigative reporter—who had won the 2006 Beat Reporting Pulitzer for detailing the secret prisons being maintained around the world—Dana Priest had more freedom. So when she got an astonishing tip that September about dreadful conditions at the Walter Reed Army Medical Center, where many of the injured from America’s Iraq and Afghanistan campaigns were sent, she was able to find a teammate herself. She chose Anne Hull.

The requirement for a partner was clear to Priest after two weeks of visiting Walter Reed, as she saw the need to determine how widespread the patient abuse was. “My head was reeling from all these different problems, and I’m trying to find patterns and put them into a framework,” says Priest. “But I’m also thinking, ‘Maybe it’s just this guy, or maybe this family’s weird or something.’”⁸

Also, Priest knew that her own expertise was in digging out information from organizations, not making families comfortable in telling their stories. Meanwhile Hull had written in the past about the orthopedic ward there, largely with a patient focus. So even though Priest barely knew Hull—herself a five-time Pulitzer finalist—she approached Hull about teaming up and combining their separate interviewing strengths. As Hull summarizes it: “Dana has spent much of her life examining broken or negligent systems or institutions. I have focused on the people being crushed or forgotten by those institutions.”⁹

Priest also saw the need for a symbol of Walter Reed’s problems that could crystallize the situation for readers. Then she heard about Building 18—a rundown slum of mold and mice and misery that, the pair would learn, was almost beyond description. “For me, that was the clincher,” she says. “We didn’t get to Building 18 for another month, at least, after we heard about it. But I knew that if this building existed, it was going to be a symbol.”¹⁰

Very clear to both Priest and Hull was that they had to report this story delicately. Any leak about their interest in Walter Reed could draw attention from medical center personnel, who would certainly try to thwart their reporting—and would likely provoke a storm of competition. With that attitude of extreme caution, Priest and Hull began a four-month process of finding families and patients they could feel safe interviewing, confident that they would not tell the authorities. “The net just kept growing, and we interviewed dozens and dozens of people,” says Hull. “Each individual story was its own sad, heartbreaking scenario with its own complications.”¹¹

While not considering this an undercover assignment, because Walter Reed was a public facility visited by veterans’ families, the reporters discussed ways to avoid arousing official suspicion that they were journalists. (At one small meeting of family members Priest attended, “I did my best to sit in the corner,” she says, but had to excuse herself when “a colonel came into the room and started to acknowledge people” one by one.¹²)

Worried that bringing in a staff photographer would attract too much attention, Priest took pictures of one room in Building 18 herself. “I was sure I’d gotten the goods,” she remembers thinking as she raced back to the newsroom. But the grainy, dark walls that showed up in her shots provoked none of the disgust that the reporters had felt upon seeing the place. So Priest and Hull welcomed photographer Michel Du Cille, a master of discrete shooting, as a teammate.¹³ Avoiding public halls with lots of people around, “he would scope out places where you wouldn’t be easily seen,” says Priest. “The best photos he took were of individual soldiers who had agreed to be photographed.”¹⁴ (Du Cille’s work was so striking that he was eventually included in the Pulitzer board’s citation for the Post, along with the two reporters.)

Writing together and working with a Post editor were the next enlightening experiences for Priest and Hull. “I wanted to pin down as many moving parts as possible, as quickly as possible, and she wanted to do the opposite—to let a thousand flowers bloom, slowly, at their own slow-as-molasses natural pace,” according to Priest. “What she draws from this is a rare intimacy, and because she is such a great writer, she can then put that on the page for all to feel.” For Hull’s part, she learned from Priest “the value in casting something in black and white.” In an interview with the Poynter Institute’s Al Tompkins, Hull said that she is often “carried away by the gray.” But instantly “Dana can figure out the mission statement or promise—‘only the best of care for our nation’s wounded’—and juxtapose it with the brokenness of something, such as Building 18.” Added Hull, “It’s hard to convey how strategic and steely she is. Those are things you can’t really learn but can only hope might rub off a little.”¹⁵

Priest wasn’t always steely during the reporting. In fact she sometimes dissolved in tears. “The depth of the injuries and the road to repair seemed so overwhelming for some of these soldiers and their families,” she told Tompkins. “Each story was the same, yet it was completely different; a different body part gone, a different, awful nightmare, a different set of burdensome family or financial problems.”

Priest relishes her memories of watching Hull draft the stories with one of the Post’s top editors, David Maraniss, better known now as a nonfiction author. Maraniss and Hull were “like kids in a candy store; they just became so excited about every sentence,” says Priest, a self-described deadline writer. “I was exhausted by it,” she adds with a laugh. “But Anne and David seemed to get more alive with every single word they would study, and change, or not change. Like, really, every single word.” And the editor’s approach made him like a third reporter. “He came in with a fresh eye and a fresh mind,” Priest says, “and so he was definitely key to getting the right tone.”¹⁶

The two-part series on President’s Day weekend began with an overview evoking disgust over Building 18, followed by the horrifying experiences of the patients and their families. The first article began:

Behind the door of Army Spec. Jeremy Duncan’s room, part of the wall is torn and hangs in the air, weighted down with black mold. When the wounded combat engineer stands in his shower and looks up, he can see the bathtub on the floor above through a rotted hole. The entire building, constructed between the world wars, often smells like greasy carry-out. Signs of neglect are everywhere: mouse droppings, belly-up cockroaches, stained carpets, cheap mattresses.¹⁷

If there was a shortcoming in the presentation, it may have been the reporters’ reluctance to insist on a bigger role for the Post’s website—a role that has lately become key to the news packaging process. Priest and Hull “actively avoided our editors” overseeing the online presentation of stories. “We were afraid that it would leak,” Priest says, noting that only in the last few years has she become comfortable putting much of her work on the Post’s site in advance of print publication. Still, readers swarmed to view whatever graphic online portrayal of the Walter Reed scandal the Post did put up.

The stories hit with what Hull calls “a ferocious wallop.”¹⁸ Reading in the Post about the “administrative nightmare and squalid living conditions endured by wounded warriors,” Defense Secretary Robert Gates held a staff meeting and the next day met with President George W. Bush. Gates then held a press conference where he said, “This is unacceptable, and it will not continue.” Gates wrote in his book Duty: Memoirs of a Secretary at War: “In a departure for a senior government official, I also said, ‘I am grateful to reporters for bringing this problem to our attention, but very disappointed we did not identify it ourselves.’”¹⁹ As investigations began, the secretary of the army fired the major general commanding the medical center within ten days of the first article, and then Secretary Gates replaced the army secretary too.