The chairman of the Securities and Exchange Commission, Christopher Cox, this week shut down the subpoenas the agency’s enforcement division had issued to journalists, and not a moment too soon. He acted after Dow Jones & Company Inc. announced that it would fight subpoenas requiring two of its journalists to testify about their sources for columns they had written about Overstock.com. On Monday, word emerged that the SEC was also going after James Cramer and his web site, TheStreet.com. It turns out that the SEC is investigating whether short sellers manipulated research firms and journalists to drive down Overstock.com’s share price.

Short sellers profit when a stock’s price goes down, making them some of the most bearish folks on Wall Street. In this case, Overstock.com charges in a lawsuit that a hedge fund, Rocker Partners, took out a short position in the company’s stock and then conspired with an Arizona-based research firm and anywhere from one to 100 unidentified others to bombard Wall Street with negative reports about Overstock.com to drive down the price. The SEC has been pursuing a similar investigation.

Overstock.com’s president, Patrick Byrne, has been waging battle against “Wall Street” for months. His stock reached a high in the $70s in December 2004 and January 2005, but of late, it’s been trading between $20 and $30. Mr. Byrne claims the price is dampened by a campaign of negative information unleashed by, well, a pretty big conspiracy. But maybe investors have instead merely concluded that the fundamentals of the company don’t justify a stock price of $77.18, Overstock.com’s all-time high.

One feature to note is that the stock has been drifting steadily down for more than a year, suggesting that Wall Street has determined that negative reports about Overstock.com contained a kernel of truth. So it may be that the short-sellers made accurate judgments and their short contracts signaled accurate information, as the putting of one’s money where one’s mouth is often does in a market. In order to credit the theory that evil doings are afoot, one has to believe that one research firm could pull the wool over the eyes of thousands of investors who would make heaps of money for proving the bearish reports wrong.

Mr. Byrne has a right to try that creative theory in court, but the SEC’s involvement is more troubling. This latest episode in respect of the journalist subpoenas shows how out of control the commission’s enforcement division has become, especially within the past decade. Prompted by outrage over corporate scandals, embarrassment over a mutual fund market-timing scandal that erupted under the agency’s nose, and competition from Attorney General Spitzer’s politicking, the enforcement division has ratcheted up its own efforts.

Yet the division’s flaws are many. It operates with minimal supervision from the appointed and accountable commissioners. In the latest instance, the SEC’s chairman, Christopher Cox, says not one of the five commissioners knew about the subpoenas before the story appeared in the press. Investigators, mostly career government lawyers who may or may not have any experience on Wall Street, can keep a case open indefinitely, and companies in the SEC’s sights have few options to force the commission to formally close an investigation for lack of evidence.

The journalist subpoenas, including that issued to Mr. Cramer, show what damage this process is capable of inflicting. In pursuit of a case with dubious grounding in basic economic theory – at least in light of the length of time that Overstock.com’s stock has been off its peak – the SEC was willing to risk chilling the very information marketplace that makes financial markets tick. At the same time, the SEC’s own enforcement process enables the kind of gamesmanship of which the targets of its investigation here stand accused. Imagine a hypothetical case in which a short-seller files a single anonymous tip of conspiracy with the SEC in the hope that word of an investigation helps to drive down a stock. Such is a worry, an expert on financial markets at the American Enterprise Institute, Peter Wallison, told us yesterday.

Mr. Cox acted in the nick of time in the latest case, suggesting that President Bush acted wisely in choosing as head of the commission a chairman who respects financial markets. Mr. Cox will have his work cut out for him in reining in investigators. This latest episode also raises questions about the wisdom of expanding the SEC’s authority to regulate hedge funds and mutual funds. The federal appeals bench is currently weighing separate challenges to both these SEC efforts. We shouldn’t have to rely on the wisdom of one SEC chairman.