Wednesday, April 12, 2006
The SEC issued a policy statement (here) setting forth its procedures for issuing a subpoena to the media during a formal investigation. The issue came to the forefront in February when the Commission issued subpoenas to three columnists who publish on-line for information about contacts with short sellers of Overstock.com shares. An allegation commonly made against those who specialize in selling short a company's stock -- a bet that the stock will decline -- is that they spread false information through the media and internet to drive down the market price of the shares. The Enforcement Division sought information from the journalists about columns they wrote that contained negative information about Overstock.com, but the subpoenas were withdrawn shortly thereafter due to the storm of criticism regarding interference with the media.
SEC Chairman Christopher Cox issued the new policy, which imposes of number of intermediate steps before the Enforcement Division staff can issue a subpoena to members of the media. First, the SEC must try to obtain the information informally, and contacts should be done through counsel for the journalist rather than by a direct contact. The benefit of this approach is that issues of whether the journalist even has relevant information, and whether a claim of privilege might be raised, can be decided before any further steps are taken. The policy also stresses that other avenues for obtaining the information should be exhausted, and any information sought should be important and not peripheral:
If negotiations are not successful in achieving a resolution that accommodates the Commission's interest in the information and the media's interests without issuing a subpoena, the staff investigating the matter should then consider whether to seek the issuance of a subpoena for the information. The following principles should guide the determination of whether a subpoena to a member of the news media should be issued:
(1) There should be reasonable grounds to believe that the information sought is essential to successful completion of the investigation. The subpoena should not be used to obtain peripheral or nonessential information.
(2) The staff should have exhausted all reasonable alternative means of obtaining the information from non-media sources. Whether all reasonable efforts have been made to obtain the information from alternative sources will depend on the particular circumstances of the investigation, including whether there is an immediate need to preserve assets or protect investors from an ongoing fraud.
Only after working through other possibilities can a request for a subpoena be made, and the decision whether to issue the subpoena will be made by the Director of Enforcement in consultation with the General Counsel. If the decision is made to issue the subpoena, the Chairman must be notified, and the terms of the subpoena negotiated with counsel for the media outlet in advance so that it can be as narrow as possible. Moreover, the policy states that "[i]n the absence of special circumstances, subpoenas to members of the news media should be limited to the verification of published information and to surrounding circumstances relating to the accuracy of published information."
All in all, the Commission's policy will make it very difficult for the Enforcement Division staff to issue subpoenas because of the many layers of review. The policy stresses a cooperative process, in which counsel for the subpoena recipient will work with the staff to shape the information request, rather than an "issue first, ask questions later" approach to obtaining information through the SEC's compulsory powers. (ph)