This earlier post noted the dust-up over the SEC’s dubious issuance of subpoenas to financial journalists over Overstock.com’s accusation that a hedge fund and a stock-research firm manipulated the media and the market to drive down the price of Overstock.com’s stock for the purpose of profiting through shorting the stock.
Now, this NY Times article reports that the SEC is seeking documents about communications that the stock research firm — Gradient Analytics Inc. — had with journalists and several hedge-fund advisers. The new subpoenas appear to be intended to gather information about Gradient’s contacts with journalists without seeking the information directly from the journalists themselves. If you can’t get the information one way, try another.
The NY Times story reports allegations that SAC, a big hedge fund, persuaded Gradient to generate a misleading and negative report on Biovail, a generic drug firm. Then, the allegation goes, SAC persuaded (bribed?) Gradient to delay publication of the negative report on Biovail so that SAC could profit by shorting Biovail stock. If true, then SAC and Gradient’s scheme is sanctionable under existing securities laws.
Although Biovail stock hasn’t been doing all that well anyway and it’s unclear whether the negative reports had any effect on the company’s stock price, the NY Times article rachets up the “more business regulation” demagogery, anyway:

Hedge funds operate with a fair amount of secrecy, which naturally shrouds them in mystery and, often, suspicion. Combine that with the veiled practice of shorting and the devaluation of stock research since the market collapse, and it becomes a recipe for concern ó if not paranoia. . . If the Biovail lawsuit can show that hedge funds are persuading analysts to come to predetermined conclusions and then asking that the reports be held so they can make low-risk bets that stocks will fall on the negative news, then the case will open another ugly chapter of corruption and greed on Wall Street.

Uh, oh. “Another ugly chapter of corruption and greed on Wall Street” are buzz words justifying another NY Times exposÈ and Congressional hearings on those evil capitalist roaders.
As usual, Larry Ribstein provides common sense advice in response to the Times article:

The danger here is that this will be seen as part of a pattern of misconduct regarding trading negative information by hedge funds ñ leading to extensive and unnecessary regulation of honest funds and researchers and the relationship between the two. . . Hedge funds are doubly vulnerable because they are not only short-sellers, but also active in a market for control that carries its own perils for incumbent managers.
The bottom line is that we should be looking for ways to encourage the market efficiency role of hedge funds and short selling, . . .

For more, see Professor Ribstein’s article that he co-authored with Bruce Kobayashi, Outsider Trading as an Incentive Device.
Look, scamming the market by timing the release of false negative information about a stock while shorting it can already get one in trouble under current securities and criminal laws. But attempting to control that type of scam through more regulation runs a much greater risk of curtailing useful market functions than preventing such already illegal market manipulation. Criminalizing statements made to the market in order to perpetuate a myth is rarely a good idea.