The increasing criminalization of business took an interesting turn earlier this week when the Securities and Exchange Commission’s San Francisco office subpoenaed email and other documents from several journalists, including one who works at Dow Jones Newswires, another at MarketWatch.com, and even TheStreet.com and its co-founder, “Mad Money”‘s James Cramer, who, ironically, is a buddy of that subpoena-issuing machine, New York AG Eliot Spitzer. My younger son — a big fan of Cramer’s off-the-wall show — got a big kick out of Cramer rebelliously throwing the subpoena on the floor during his television show.
The subpoenas started flying after the online retailer Overstock.com accused a hedge fund and a stock-research firm of manipulating the media to drive down the price of its stock for the purpose of profiting through shorting Overstock.com stock (this tactic is described earlier here and here). It apparently meant little to the SEC Enforcement Division that the reporters were simply doing their job of tapping sources for information and then reporting that information to investors who make informed judgments in buying and selling stocks. Some of those sources may have even profited from shorting Overstock.com stock. Who knows and, frankly, who cares? So long as reporters are reporting what they learn and are not bribed to do so, they are simply doing their jobs and fulfilling their role in the complicated workings of efficient financial markets.
Then, in an extraordinary development, SEC Chairman Christopher Cox called off the SEC Enforcement Division dogs and issued a public rebuke of the division for failing to obtain his approval for issuing the subpoenas in the first place. Although I am occasionally critical of the media’s reporting on the increasing criminalization of business by various governmental entites, I viewed Cox’s action as a good thing and an indication that he was intent upon implementing responsible oversight of dubious regulatory initiatives that has been sadly lacking in the SEC and the Department of Justice in the post-Enron era.

With that backdrop, I was surprised to read Chronicle business columnist Loren Steffy’s column today in which he calls for Cox’s resignation as a result of his pullback of the subpoenas. Steffy, who generally favors more regulation of financial markets than I think is necessary or advisable, contends that Cox’s action improperly politicizes the decision-making process within the SEC Enforcement Division and effectively portends an anti-enforcement policy of regulatory rules. That this position is difficult to square with his earlier column on shorting generally (related blog post here) makes no difference to Steffy — Cox must go to save the cause of regulation protecting investors from the greedy business crooks.
Well, someone needs to take up the cause of the business reporters and I’m glad to do it. The SEC subpoena flap reflects a misguided desire to control financial information, which is precisely the mindset that generated Regulation FD, the regulation that bars publicly-traded companies from sharing certain information with analysts before it is broadcast to the public. The fact that Regulation FD is based upon a myth has not stopped various governmental entities from pursuing questionable investigations and prosecutions of various business executives who — in the regulators’ view — misstate positive or negative news about their company. The SEC subpoenas took that dubious policy one step further by threatening journalists who are simply doing their jobs of reporting information that markets rely upon. It is with more than a touch of irony that the SEC subpoenas targeted the same media that the SEC and Spitzer-type prosecutors use in their propaganda campaigns against the unpopular businessperson of the moment.
At the end of the day, I’m not too concerned about this governmental assault on the journalists because the reporters have the rather powerful protection of the First Amendment on their side, which is a defense that the Ken Lay, Jeff Skilling and Hank Greenberg’s of the businessworld do not have in their battles with the government. However, here’s hoping that the media’s experience of being the recipient of such dubious governmental initiatives has the beneficial effect of making the media more skeptical of the government’s motives and tactics in such cases and leads to a more reasoned analysis of whether the staggering costs of such regulation-through-criminalization is really in the public interest.
Update: This OpinionJournal piece makes several of the same points that I address above and more.
Update II: Loren Steffy responds and clarifies his position on his blog.
Update III: As usual, Larry Ribstein has a common sense view toward the assault on the shorts:

But we shouldnít let these relatively side issues obscure the essential perversity of attacking short-selling. To the extent that short-sellers break the law, as by manipulating or lying, they should be punished with everybody else. But short-selling is more a solution to market inefficiency than a problem in itself.