So much Evidence.....

...And so little action.

Monday February 27, 2:15 PM EST

By Karey Wutkowski

WASHINGTON (Reuters) - The head of the U.S. Securities and Exchange Commission said on Monday that top agency officials were not informed before a regional office took the "highly unusual" step of issuing subpoenas to two journalists in a stock manipulation investigation.

In a rebuke to SEC staff in the San Francisco office, SEC Chairman Christopher Cox said "sensitive issues" raised by the subpoenas "should, and will be, considered and decided by the commission before this matter proceeds further."

Former SEC officials said Cox's statement was a rare public scolding to staff for departing from the general agency practice of avoiding media subpoenas and for failing to check in with superiors in Washington on a sensitive press matter.

The SEC regional office issued subpoenas earlier this month to columnists from two Dow Jones & Co. (DJ) publications, asking for telephone records, e-mails and other documents related to online retailer Overstock.com Inc. (OSTK), according to sources familiar with the matter.

"Until the appearance of media reports this weekend, 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 SEC is investigating accusations by Salt Lake City, Utah-based Overstock.com that stock-research firm Gradient Analytics Inc., of Scottsdale, Arizona, negatively adjusted research on Overstock after a hedge fund betting against the company's stock requested a change.

Overstock filed a lawsuit in August claiming Gradient and Rocker Partners, a hedge fund run by well-known short-seller David Rocker, were scheming to drive down its stock price.

The dispute marks the latest flashpoint in a long-running war between short-sellers -- who try to profit from a declining share price by selling borrowed shares and then buying them back more cheaply -- and the companies targeted by shorts.

Overstock's Web site refers to CEO Patrick Byrne being in the news "because of a fight he is waging with Wall Street."

Byrne "believes that Wall Street is cheating Main Street by destroying small companies for a profit, that the SEC is failing to protect small investors and small companies because they have gotten too close to Wall Street and that the New York financial press is similarly co-opted," the Web site says.

Shares of Overstock fell 43 cents, or 1.82 percent, to $22.97 on Nasdaq at mid-afternoon.

PROPER CHANNELS

The SEC subpoenas were issued by the investor protection agency's San Francisco office, and were an attempt to figure out any role the journalists might have had in disseminating any manipulative information regarding Overstock.

But former SEC officials say subpoenas to journalists are usually not a productive means of furthering an investigation.

"It would be a rare circumstance in which it would be critical to get information from reporters on their sources," said Greg Bruch, a former SEC official and now a partner at the law firm of Foley & Lardner.

Bruch said Cox's statement is a clear rebuke to SEC staff.

Donald Langevoort, a professor at Georgetown University Law Center, said a sensitive issue such as journalist subpoenas should be run by top agency officials.

"Certainly anything of public controversy which gets into the press ought to be discussed with the commissioners," Langevoort said.

Bruch said the SEC was unlikely to seek more information through the subpoenas after the attention they got.

There were already indications the SEC is backing off.

News of the issue broke after one of the subpoenaed journalists, Herb Greenberg of online publication Marketwatch, posted a column on Friday, saying the SEC sought unpublished communications between him and people he has quoted.

Greenberg and Carol Remond of Dow Jones Newswires, who was also subpoenaed, have written articles critical of Overstock.

After Greenberg's column came out on Friday afternoon, he updated it that evening, writing, "I'm no longer being asked to provide the SEC all of my 'unpublished' communications."

Jonathan Johnson, senior vice president of legal for Overstock, said he's glad the SEC's investigation buttresses the company's own lawsuit and hopes the agency doesn't back down.

"I hope the commission does the right thing and continues to pursue the subpoenas," he said.

(Additional reporting by John Poirier and Kevin Drawbaugh)

©2005 Reuters Limited.