Wall Street Journal: The SEC Should Leave Journalists Alone
Washington, D.C., partners David Rivkin and Bruce Brown co-authored an article, "The SEC Should Leave Journalists Alone," which was published in the Opinion section of the November 7, 2008, edition of the Wall Street Journal.
According to the authors, "Today the marketplace urgently needs the press and independent analysts to dig for truth without government second-guessing. Nevertheless, early next month the Securities and Exchange Commission will be arguing for the first time to a federal appeals court that it can regulate publishers. The SEC's weapon is Section 10(b) of the Securities Exchange Act of 1934, the general anti-fraud provision that prohibits false statements made 'in connection with the purchase or sale of any security.' Section 10(b) has, appropriately, been applied to various players in the securities business—issuers, brokers, dealers, underwriters, traders and professional investment advisers. But no court has ever found Section 10(b)'s 'in connection with' requirement satisfied by publishers who do nothing more than write about stocks."
Rivkin and Brown continue: "The SEC crossed that line by suing a stock-market newsletter for damages and injunctive relief in a case that has now dragged on for five years. The government's complaint is based on a conversation between writer Porter Stansberry and a source at a public company. Mr. Stansberry believed the source had disclosed that an important contract for the company would soon be approved, and he published the information in a report offered to subscribers of his newsletter, Porter Stansberry's Investment Advisory."
"Absent is the only factor that would have explained SEC involvement: stock trading by the writer in the subject company," state the authors. "The government should intervene when day traders, masquerading as disinterested analysts, profit from their own sales. But the SEC has no more business penalizing a writer who simply covers the markets than the Food and Drug Administration has in regulating a cookbook publisher because an official questions the nutritional content in a meatloaf recipe."
Rivkin and Brown conclude: "From mainstream journalism to kitchen-table blogging, disinterested stock analysis boosts market efficiency. Once the threat of securities law liability hangs over their heads—either from SEC investigations or the inevitable plaintiff strike suit—publishers will have every incentive to stay away from the tough Wall Street coverage that the public needs. In leaving publishers outside the scope of securities regulation, we live with the risk of some downside—they will make mistakes—in order to benefit from the possible upside—they may spot the next Fannie Mae or Lehman Brothers before it's too late. Now that's a hedge worth taking."