"My granddad played the ponies. My pop bought Lotto tickets. My mom tries her luck in the Publishers Clearing House sweepstakes. I work in Silicon Valley, where the name of the game is 'friends and family' stock.

"... As tech gossip columnist at the San Jose Mercury News, I recently got my first taste of the action. How did I come to take part? The old-fashioned way. I knew somebody."

                                                   -- Chris Nolan, Fortune

By the time Chris Nolan's personal account of how she participated in a "friends and families" offering of stock ran in Fortune magazine this August, management at the San Jose Mercury News, alerted by a Wall Street Journal item, had stripped her of her high-profile "Talk is Cheap" column.

Nolan still insists that she crossed no ethical lines in buying stock at insider prices in a newly public Internet company, selling it a day after the company went public for $9,500 profit and telling all on the pages of Fortune five months later.

"I don't think I did anything wrong," she says, noting that before buying 500 shares of Autoweb.com through its chief executive officer, a man she described as a former source and current friend, she had consulted her immediate supervisor. "At no time did anyone at Mercury News management question my judgment, my ethics, my behavior, anything. Period."

Mercury News Executive Editor David Yarnold, who first suspended and then reassigned Nolan to the suburbs after the July 15 Journal piece, says he is through talking about the incident, which the Newspaper Guild has taken to arbitration.

In a Sunday column he explained: "Central to most [newspaper ethics codes] is a commitment to bend over backward to avoid conflicts of interest, or even the possible appearance of conflicts of interest, that could arise from having too-cozy relations with those we cover."

What Yarnold hasn't explained is why Nolan's editor, who says he simply forgot to get back to her, escaped with a comparatively token two-day suspension. Or why the Mercury News -- in the heart of Silicon Valley's overheated high-tech economy -- was relying on a 15-year-old ethics policy that reporters don't routinely review and Nolan says she never saw. Or what he has learned from a painful public dispute that has increased anxiety among reporters unclear about where to draw the line when it comes to their own investments.

It is this last issue -- of when and how journalists' financial investments become financial entanglements -- that is likely to bedevil editors and ethicists long after the recriminations over who was right and who was wrong recede.

From conversations with Mercury News staff and outsiders, it seems clear that neither Nolan nor her paper's management will emerge unblemished, regardless of the arbitrator's conclusions. Less clear is how to help reporters and editors elsewhere from making similar mistakes.

Certainly, journalists and educators agree, the contemporary terrain is treacherous.   "I think [investment conflicts] are going to be a growing problem for our profession," says a concerned Diana B. Henriques, a veteran investigative financial reporter for The New York Times.

The reasons? A business culture that's inculcated itself into every corner of American society, a market that for nearly a decade has dazzled, and a journalistic culture increasingly shaped by what Henriques calls the "insatiable public appetite for business news."

Sprinkle the new gold dust called Internet offerings around the Bay Area and Silicon Valley, set reporters down in a county where the median house price is approaching $400,000, leave a paper's ethics policy stacked in a metaphorical back room, and the recipe spells trouble.

Henriques says her heart sank when she read about Nolan's case, not so much because of what Nolan had done but "because the activity it represented seemed so unremarkable [at the time] to the people involved."

People like Bert Robinson, the Mercury News' then-assistant business editor, who says he hadn't realized Nolan was asking him about a local company when her request for a ruling slipped off his "to-do" list. Or Executive Business Editor Peter Hillan, who, when The Wall Street Journal asked how uncomfortable he was with Nolan's stock deal on a scale of 1 (extremely) to 10 (not at all) reportedly answered, "5." Or possibly Assistant Managing Editor Ann Hurst, who says she was stunned when Nolan told her of the pending Fortune piece over lunch, but acknowledges she didn't say so because "the deed was long done and she presented it in a way that made it seem it had long been vetted and approved."

Then there is Nolan herself, who has expressed no ethical concerns about buying $7,000 of stock at prices not available to her readers, in a company at least broadly on her beat, from a man whom she met as a source.

"In the long bull market we've had, it is easy for journalists to feel they are left out," suggests Josh Mills, a former New York Times business editor who directs a graduate business journalism program at New York City's Baruch College. "That makes it all the more important to have standards, to disseminate them and, if necessary, to defend them."

The question gnawing at editors is defining what standards.

Should journalists be barred from holding stock in individual companies? Some business and investing publications, including TheStreet.com, say "yes." But, The New York Times' Henriques points out, limiting investments to mutual funds may not be an ethical panacea for a reporter who, as she once did, also investigates mutual funds.

Should journalists be barred from holding stock in an industry they cover? Perhaps. But how can that be applied to high tech? What company in today's world is not high tech, if having a corporate Web site and doing online marketing qualify?  

Should they disclose all holdings to editors or to the public? Disclosure can be sticky, says Barney Calame, deputy managing editor of the Wall Street Journal, because at times it invades individual privacy. And, as Jai Singh, editor of CNET News.com, learned, disclosure can confuse readers. When Intel owned part of his Web news operation, his reporters routinely told readers. The result: "Many readers thought we were a propaganda machine for Intel."

Itemizing a list of "don'ts" for reporters also holds risks, says Leo Wolinsky, managing editor for news at the Los Angeles Times. "When you ban particulars like that you really have to ban them all," he says. "Some guidelines are pretty good even though they are somewhat vague."

Of course, not all the thorny issues of investment conflict of interest are new. In the years prior to the crash of '29, for example, reporters periodically took payments from market operatives who had invested in questionable companies. The reporters plugged the stocks, pushing up their values, and then the insiders bailed out. In his book, "The Great Crash," John Kenneth Galbraith tells of one New York Daily News columnist, known as "The Trader," who received $19,000 from a single shadowy market figure in 1929 and early 1930.

In the mid-1980s, a group of traders profited from a journalist's greed in a different way. Wall Street Journal columnist R. Foster Winans was dismissed and, eventually, convicted of federal mail and wire fraud for releasing the contents of his stock-tip column before its publication.

Such rare cases of overt corruption magnify any journalistic actions that could create even a suspicion of conflict. Still, manipulating the market is a far cry from investing in it -- a distinction most media companies attempt to delineate clearly in their ethical codes.

"It seems to me a point of universal agreement that financial journalists shouldn't profit from advance or confidential information they obtain, whether it's in the course of doing their job or in the course of socializing with their sources," says Baruch College's Mills.

He says he also favors restricting specific activities -- such as participation in "friends and family" offerings -- that can leave a perception of conflict. "There are certain types of financial investments where your ability to participate or to succeed may come from access or information that is not publicly available," he says. "I think financial journalists would do well to steer clear of them."

But ethicists point out that written words alone won't prevent problems, no matter what ethics codes spell out.

Codes need to be distributed, discussed and updated regularly, says Louis W. Hodges, Knight professor of ethics in journalism at Washington & Lee University in Virginia. If the Mercury News failed to give its policy to staff and to incorporate it in the newsroom culture, "it was mismanagement of the grossest sort," he adds.

(One editor at the Mercury News, who declined be identified, insists Nolan did read the newspaper's conflict-of-interest policy. Robinson, her direct supervisor, says he was not asked to review the policy when he moved to the business desk.)

"It's in the interest of a newspaper that the policy is both understood and followed,"Hodges says. "ere the notion of punishment is nowhere near as important as it is to get the staff to apply the policy."

Management can help by appointing an ethics ombudsman to whom reporters can turn to work out sticky situations, he adds.

William A. Babcock, who directs a media ethics and law center at the University of Minnesota, says poorly defined and discussed ethics codes remain a problem industry-wide.

"It's worse to have a poorly disseminated ethics code than to have no ethics code at all," he adds. "If people don't know what's out there or have some vague knowledge of what's out there you are open to all kinds of misinterpretation."

Babcock recalls a visit to a major East Coast daily a few years ago.

"I stopped in to see the ombudsman and said, 'Tell me about your ethics code.'

" 'We're revising it,' he said.

"My next interview was with the new editor, and I said, 'What can you tell me about your ethics policy?' and he said, 'We don't have one.' ''

Babcock said he, too, would have concentrated on educating the Mercury News' staff and readers rather than meting out punishment.

"If I were Yarnold, I'd have said, 'It's now time to look at our ethics policy. We're going to involve these reporters and editors. We're going to involve these experts to help us with this discussion.' And then I would have reported on the whole thing. ... If there's a down side [to that approach], I don't see it."

Yarnold has appointed a committee to recommend revisions in the paper's ethics code. It's a challenging task, says Dan Gillmor, a tech columnist who co-chairs the panel.

"There are a lot of issues -- from financial holdings to possible conflicts in volunteer work … where there is no single line you can draw above which it's OK and below which it is not OK," he says. "What we are recognizing is that there really are two lines. Below one, you don't think about doing something because it's obviously wrong. Above the other, it's obviously fine. Our goal is to push those lines together as much as possible. But we need to recognize where the gray area is."

Did Nolan's purchase and sale fall in that gray area?

Gillmor declined comment on that. But to some supporters, she clearly was more victim than culprit.

"Ninety to 95 percent of what she did was good enough for me," says Thom Calandra, executive editor of CBS MarketWatch.com, a San Francisco-based financial news Web site. "She went and talked to people, and they didn't give her a red light."

At the University of Minnesota, Babcock also describes Nolan as a "bit of a scapegoat." Nonetheless, as Henriques at The New York Times points out, ethics starts from within; codes merely serve as a reminder of institutional standards.

"Your personal integrity, your reputation for integrity is your own," she says. "You still have to take personal responsibility."

At the Poynter Institute in Florida, Bob Steele, an author of "Doing Ethics in Journalism" and leader of its ethics group, agrees that the Nolan case involved more than cloudy management.

"What seems very clear to me is that she was in minefield territory," he says. "Whether the paper had clear enough guidelines or whether her editors gave her proper advice remains to be determined. But she was clearly in a field with land mines."

Land mines that have since gone off.