Pressing the Press—Again

The revelation last Friday that the Securities and Exchange Commission had taken the rare and controversial step of subpoenaing business journalists has shaken up First Amendment advocates, Wall Street and the SEC itself. Financial executives have been particularly wary of the press since the stock market bubble burst in March of 2000 and  reporters ramped up their coverage of the ensuing financial scandals.  Even so, the execs I've spoken to couldn't believe that Christopher Cox, the SEC's chairman, would squeeze journalists for information about possible stock fraud involving the online retailer Overstock.com Inc.

But news of the subpoenas was apparently as much of a surprise to Chris Cox as it was to everyone else. On Monday, Cox announced that he learned of the subpoenas of the press from the press. "Neither the chairman of the SEC, the general counsel, the office of public affairs, nor any commissioner was apprised of or consulted in connection with a decision to take such an extraordinary step," Cox said in a statement.

The firestorm began when the SEC's enforcement division unilaterally subpoenaed telephone records, e-mails and other documents related to Overstock.com from Carol Remond and Herb Greenberg, both of Dow Jones Inc. and CNBC commentator James Cramer. Greenberg wrote about the request for his notes in his Marketwatch.com column on Friday. By Monday, Cox had his hands full trying to dispel the idea that journalists were suddenly fair game for SEC investigators looking to uncover financial fraud.

The SEC probe in question centered around allegations that short sellers and an independent research firm manipulated shares of the Salt Lake City-based Overstock.com. Overstock is a retailer not much different than Amazon.com. One key difference however is financial performance—Amazon's is fairly good and Overstock's isn't. Just Tuesday, Overstock had to restate its earnings indicating that management may not be entirely on the ball.

But that hasn't stopped the company's president, a mercurial man named Patrick Byrne, from attacking anyone who seems to think Overstock's promise was oversold. Bryne has been on a rampage of late, saying a coterie of hedge funds, led by someone he called "The Sith Lord" (after the "Star Wars" villain), is out to get the company.

I've covered business news for years, and colorful people like Patrick Byrne often supply much-needed comic relief from the mundane coverage of earnings reports and economic data. That is until Bryne started to be taken seriously by Wall Street's top regulator—the SEC. Byrne has accused one of the subpoenaed journalists, Greenberg, a San Diego-based columnist for Dow Jones' MarketWatch.com of conspiring with the market manipulation of his company's stock. Instead of ignoring his statements, the SEC chose to investigate them. Linda Chatman Thomsen, the sober director of the SEC's enforcement division and the second-most-powerful person at the commission after Cox, gave the green light to the SEC's San Francisco office to subpoena journalists to turn over information about their ties to the hedge fund in question, namely Rocker s, and the independent research firm, Gradient Analytics Inc.

Both journalists have denied any links to the hedge funds. And in his Friday MarketWatch column about the subpoena, Greenberg was indignant about the SEC's request for his notes saying that he had no financial interest in any of the companies mentioned and adding:  "... if my unpublished communications aren't safe from government eyes, then the tools of every business reporter in this country become fair game for any company that doesn't like scrutiny and chooses to play the 'conspiracy' card."

With what looked like an unpleasant press-freedom fight brewing, Cox spent Monday distancing himself from the actions of the SEC's enforcement division. In addition to saying he had no prior knowledge of the requests to the reporters, he added that the SEC has now developed a process requiring that the full commission must be consulted before the "extraordinary step" of subpoenaing a journalist is taken. And one more thing: no journalist will be forced to give a deposition in connection with this inquiry—at least for now.

The caveat "at least for now," is important here, because Cox didn't rule out ever calling reporters in as witnesses, and putting them through the paces that other SEC subjects are put through, meaning they must not only answer questions, but also hand over documents, e-mails and possibly most damning for any journalist—their sources. In fact, my own sources at the SEC tell me that Greenberg and the other journalists involved in the Overstock story may still be called in to testify about the case. Cox, they say, wants the testimony of journalists to be taken only rarely, and only as a last resort.

To be honest, I am not all that comforted by Cox's go-slow approach. In public, Cox appeared to rebuke Thomsen's decision to subpoena journalists, but my sources at the commission say he acted much differently privately. One said he called both Thomsen, and the SEC officials leading the Overstock investigation in the commission's San Francisco bureau and gave them his "unflinching" support. Cox, these people say, wasn't so much concerned about sending subpoenas to journalists, rather, he didn't like the public perception that the SEC was somehow trying to curtail the free flow of information about stocks, something it has vigorously defended in the past. In other words, under certain circumstances, Cox might not have a problem hauling a bunch of journalists down to SEC headquarters and having them answer questions and possibly hand over their sources.

Since this story first broke, many financial journalists have weighed in on the subject, so I won't bore you with the obvious implications all this has on the First Amendment, not to mention the ability of journalists to do their jobs protecting small investors from fraud and abuse. But I would like to discuss the SEC's decision making in targeting journalists for information. It has been said that the SEC was on a fishing expedition; this, I am told, is not true. The very fact that Thomsen approved the subpoenas in the first place bears this out. The SEC's enforcement chief doesn't approve every subpoena issued by her staff. The enforcement people in San Francisco had the good sense to at least vet this with their boss before going the extra step that set off the current firestorm.

There is another issue here as well. As a financial journalist I've always approached my job as that of a watchdog. Usually, that puts us on parallel tracks with the people at the SEC whose job is also to root out crime and abuse and protect small investors from miscreants in the financial world. In their investigation of Overstock, the SEC's top officials apparently believed that journalists could play the same role as other witnesses in their investigations since journalists are known to consort with all sorts of people, even the people they are investigating.

I throw out the SEC's explanation not because I agree with it, but because it's worth noting. Of course there are significant First Amendment issues when the government forces reporters to give up sources, etc. But the SEC may be on firmer ground than we journalists may think. Remember last summer when The New York Times's Judith Miller was thrown in jail for not revealing her sources in the Valerie Plame CIA leak case? Public opinion wasn't on the side of Miller as she languished in jail before finally announcing that her source had given her permission to reveal his name before walking free. And I bet, if Linda Thomsen and the SEC chose to pursue journalists in the Overstock case, public opinion would come out the same way.

In other words, no matter what Chris Cox says now, this issue isn't dead by a long shot.