Reporters discover the joys of SEC enforcement.
Thursday, March 2, 2006 12:01 a.m. EST
The recent flap over Securities and Exchange Commission subpoenas to financial journalists hasn't been welcome in our precincts, but the silver lining is that it has been educational. The press corps is learning what it's like to be an American businessman in the post-Enron age.
The story is that the SEC's San Francisco office subpoenaed email and other documents from several journalists, including one who works at Dow Jones Newswires and another at MarketWatch.com, both owned by the publisher of this newspaper. Also served were TheStreet.com and its co-founder, the effervescent James Cramer, who tossed the subpoena to the floor during his CNBC TV program. Suddenly, First Amendment claims were flying hard and fast, and not without cause.
The subpoenas came after an online retailer, Overstock.com, accused a hedge fund and a stock-research firm of using the media to drive down the price of its stock. To put it another way, the journalists are suspected of having sources who tell them things that they then share with their readers or listeners. Where we come from this is called reporting, or providing facts to investors who can then make more informed decisions.
Now, some of this information was negative about Overstock.com, and seems to have caused the company's stock price to fall. A few short sellers may have benefited from this price decline and one or more may even have been sources for the journalists in question. We don't know and don't care.
It takes a difference of opinion to make a horse race, or a market in a stock, and the world of stock trading is full of positive and negative opinions about tens of thousands of companies. Had journalists made more of short-seller viewpoints on Enron in early 2001, thousands of investors and employees might have been spared a lot of pain. As long as journalists at Dow Jones are honestly reporting what they learn--and are on nobody else's payroll--they are doing their jobs and serving the cause of efficient financial markets.
The SEC's subpoena flurry betrays an all too eager desire to manage and control financial information. It's part of the mentality that a few years ago produced Regulation FD, which bars publicly traded companies from sharing certain information with research analysts before it is broadcast to the public. This has led to harassing enforcement actions against corporate officers who innocently drop a fact or two of positive or negative news about their company. Now the SEC scolds are harassing journalists who report market-moving facts based on their daily digging.
The subpoenas also reflect the bully-boy tactics that have infected the SEC enforcement staff in recent years. They've acquired the Eliot Spitzer afflatus, which is to fire off subpoenas before asking questions and assume that they have a right to see any and all emails and any other communications.
The irony here is that many financial reporters and columnists have benefited by receiving the leaks of those emails from the SEC and Mr. Spitzer's office, spun of course to make a target company look bad. These journalists are learning how it feels to be on the receiving end of such blunderbuss discovery. At least they have the First Amendment to protect them, not to mention the airwaves or barrels of ink to defend themselves publicly. The average Wall Street trader has no such recourse.
This episode also appears to have been educational for SEC Chairman Christopher Cox, who along with other Commissioners wasn't told about the subpoenas before they were issued. At least one of the subpoenas was approved by no less than the head of SEC enforcement, Linda Thomsen. That even she failed to inform her superiors is another illustration of the arrogance that has infected the SEC staff since former Chairman Bill Donaldson failed to provide any adult supervision. This disregard for the agency's appointed leaders reached an apex last year when legal staffers inserted a clause into a mutual fund rule that made it difficult for Commissioners to have a say in future litigation over the new rule.
Mr. Cox has now put the journalist subpoenas on hold, while delivering a much-need rebuke to the staff about proper procedure and overzealous enforcement. He says the Commissioners will soon consider the subpoena matter themselves, which means putting the grownups back in charge.
Perhaps it's too much to ask of our brethren in the financial press that they show greater skepticism toward the leaks and accusations of the SEC staff that are their daily bread. But it's not too much to expect that Mr. Cox and his fellow Commissioners rein in their staff and return due process, rather than headlines, to the center of SEC enforcement.
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