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Sunday, March 6, 2005 - Page updated at 12:16 a.m.

InfoSpace probe led to crucial court ruling

Mike Fancher / Times executive editor

"Justice in all cases shall be administered openly, and without unnecessary delay."
— Washington State Constitution, Article 1, Section 10

Today's Seattle Times investigative report on InfoSpace is a story born of incredible journalistic determination. It wouldn't have been possible without those 12 words in the state constitution and the persistence of two reporters.

The essence of the story by David Heath and Sharon Pian Chan is captured in its title, "Dot-con job: How InfoSpace took its investors for a ride." What a ride it was, as former InfoSpace executives made millions of dollars, while many stockholders lost almost everything.

It is a story the former executives desperately didn't want told. "They did everything they could do to keep us from telling this story," Heath said.

Just five years ago, InfoSpace was the Northwest's biggest Internet company, worth $31 billion. On paper it was worth more than Boeing, but over the next two years it imploded as dramatically as the Kingdome. Stock worth $1,000 in March 2000 was worth $2.67 by June 2002.

"The company once worth more than Boeing fell to the value of two Boeing 777s," the story says. Here's more:

"At its peak, InfoSpace alone accounted for about a third of the $100 billion in stock value created by the Puget Sound area's 20 publicly traded dot-coms. The company played a major role in the region's dot-com boom, which produced legions of young, overnight millionaires and defined an era.

"Most of that wealth seemed to have been the product of a speculative stock-market bubble. However, the inside story of InfoSpace shows that, at least in this case, investors were manipulated.

"The system did little to protect them."

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InfoSpace was at the heart of the dot-com boom and bust. "That time redefined the culture of Seattle. It changed the DNA. The dot-com collapse was a seismic event," says James Neff, Times investigations editor.

InfoSpace was more than just an economic collapse. The full story involves misuse of insider information, accounting tricks, inflated claims and market manipulation "all bundled into one case," Neff said.

Heath recalled, "We started by going through available public documents and talking to sources. We quickly found lots of fascinating details that made us want to delve deeper. We started to get a sense of the story early on.

"We talked to scores of sources who either worked at InfoSpace or had business dealings there. However, very few of them were willing to speak on the record about what was going on behind closed doors at InfoSpace. Some cited confidentiality agreements. Some said they feared being sued. Some just said it wouldn't do them any good to go public.

"So our only choice was to get documentation," he said.

Some InfoSpace executives were suing each other, and investors were suing the company. But those suits weren't much help because InfoSpace made a practice of asking courts to seal documents from scrutiny, and both federal and state courts routinely acquiesced.

In 2003 The Times persuaded two federal judges and a state judge to unseal hundreds of documents in three different suits. A fourth case proved more difficult, requiring almost two years of litigation and an appeal to the state Supreme Court after the trial-court judge refused to unseal the records.

In that case, a shareholder, Thomas Dreiling, had accused InfoSpace founder, Naveen Jain, and others of illegal insider trading and deceiving shareholders. All of the records had been sealed.

"Clearly the investing public had an incredible interest in knowing what had happened" at InfoSpace, said Judith Endejan, the attorney who argued the case, Dreiling v. Jain, for The Times.

In a 9-0 landmark decision last year, the Supreme Court ruled that judges should not allow the wholesale sealing of the court records in civil cases. The court set stringent criteria for sealing records, consistent with a decision justices reached in Times v. Ishikawa, a 1982 case regarding criminal trials.

Justice Tom Chambers wrote the Dreiling opinion, saying: "The open operation of our courts is of utmost public importance. Justice must be conducted openly to foster the public's understanding and trust in our judicial system and to give judges the check of public scrutiny. Secrecy fosters mistrust."

Endejan said, "This case was about principle, and that principle is embodied in our constitution. I think it was well worth the effort. It speaks well of this state."

The Supreme Court sent the issue back to the trial court so that the newspaper's request for unsealing records could be evaluated in light of the strict criteria.

"The bottom line was we got every single document," Heath said. "The documents were voluminous and it took time to go through them carefully. We were surprised by what we found.

"We confirmed the details with sources. However, by the time we obtained court records and had digested them, Jain and many other former InfoSpace executives were bound by a confidentiality agreement they signed as part of a court settlement. It was frustrating that just as we got the cloak of secrecy lifted, the people in our story agreed not to answer our questions."

In all, Heath and Chan interviewed more than 100 people and examined some 25,000 pages of court records and documents, including material they had obtained under federal and state public-records laws.

"We had to piece it together ourselves," said Heath, adding, "I think our persistence paid off."

The investigative report continues in The Times tomorrow and Tuesday. The stories and many of the supporting documents can be found on our Web site, www.seattletimes.com/dotconjob/.

The Supreme Court's decision did more than make it possible for The Times to report the details of an extraordinary story. Judges now must think twice before granting protective orders to seal records in civil cases.

"I've perceived a change already from this landmark decision. It's made a difference," Neff said.

Attorney Endejan added, "Our right to access was clarified, strengthened and preserved."

Inside The Times appears in the Sunday Seattle Times. If you have a comment on news coverage, write to Michael R. Fancher, P.O. Box 70, Seattle, WA 98111, call 206-464-3310 or send e-mail to mfancher@seattletimes.com. More columns at www.seattletimes.com/columnists

Copyright © 2005 The Seattle Times Company

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