SEC Ends Probe of Research Firm in Case That Sparked Press Furor
Marcy Gordon
February 14, 2007 - 1:50 p.m.
WASHINGTON (AP) - The Securities and Exchange Commission has completed an investigation of Gradient Analytics Inc. and is taking no action against the research firm in a case that created a furor last year over the SEC's subpoenaing of journalists, Gradient said Wednesday.
The SEC began its investigation in late 2005 after online discount retailer Overstock.com Inc. accused Gradient of issuing negative research reports on the company in exchange for payments from a hedge fund seeking to profit from a drop in its stock price.
In the course of its inquiry, the SEC subpoenaed three online financial columnists last February for telephone records, e-mails and other material related to Overstock.
Overstock Chairman and Chief Executive Patrick Byrne publicly accused Gradient and the hedge fund, Rocker Partners, of contributing to the decline of Overstock shares through biased reports as the fund was short-selling the stock.
Gradient made public Wednesday a letter from SEC enforcement official Marc Fagel informing Gradient's attorneys that the investigation had been terminated without any enforcement action being recommended by the agency staff.
"We are not surprised by the SEC decision," Gradient's president and CEO, Brad Forst, said in a statement. "We believe our business conduct has always been conducted with integrity. We cooperated fully with the SEC to demonstrate that we have nothing to hide."
SEC spokesman John Nester declined to comment. The agency customarily neither confirms nor denies the existence of investigations.
Jared Matkin, a spokesman for Overstock at its headquarters in Salt Lake City, said the company had no immediate comment.
The subpoenas — to Herb Greenberg of MarketWatch, Carol Remond of Dow Jones Newswires and James Cramer, writer of a column for TheStreet.com — came at a time of acute sensitivity over press freedom and government action against journalists, and from a regulatory agency with only civil powers that rarely subpoenas journalists or news organizations.
A second SEC subpoena to Scottsdale, Ariz.-based Gradient demanded records related to its contacts with journalists.
The journalists' employers objected to the subpoenas, and First Amendment advocates publicly criticized the SEC move.
In late February, SEC Chairman Christopher Cox took the unusual step of halting the agency's pursuit of the subpoenas. He said SEC enforcement attorneys should have consulted him because of the sensitivity of ordering journalists to hand over records.
In April, the SEC announced a new policy on subpoenaing journalists, calling for the agency to avoid issuing subpoenas "that might impair the news gathering and reporting functions." Under the new guidelines, any subpoena issued to a journalist must be approved by the SEC's enforcement director.
Rocker Partners wasn't the only big investor taking a bearish short position in Overstock's shares, but Overstock filed affidavits from three former Gradient employees alleging that Rocker asked the researchers to include "more negative information" in reports on Overstock and to "downplay any positive facts." One of them also contended that some reports were withheld for a time so Rocker could make trades in the stock.
In short selling, which is legal, traders sell stock they have borrowed. They wait for the share price to fall, buy back the shares and then return the loan, pocketing the difference.
But Byrne, the Overstock CEO, alleged that his company was a victim of illegal "naked shorting," in which traders sell stock they haven't actually borrowed in a bid to damage public companies.
When investing always start with an assumption that the stock market is dead wrong.
