Short's story

(Fortune Magazine) -- "This is indeed a concern and we will tackle it." That was SEC chairman Christopher Cox's handwritten note to a senator worried that companies were retaliating against analysts who produced research critical of them.

Almost three years later, it's hard to see any sign that the SEC takes this issue seriously. Stories about companies not permitting questions on conference calls from critical analysts, or excluding them from meetings, are routine. These days we have lawsuits, job loss, and the slander of those whose livelihoods depend on their reputations.

In a new book, "Fooling Some of the People All of the Time," David Einhorn, who runs a $6 billion hedge fund called Greenlight Capital, recounts his multiyear battle with Allied Capital (ALD), a publicly traded private equity firm. Einhorn thought Allied was fudging its books. In 2002 he shorted Allied's stock and gave a speech in which he outlined his views. (Einhorn is still short.) Whether Einhorn proves his case or not is a column for another day; Allied, in a statement, calls the book "a self-serving rehash of David Einhorn's campaign against Allied Capital for the past six years," and says that "no independent third party has concluded that his portrayal of Allied Capital has merit."

But the most troubling material concerns an issue that is bigger than Allied and Einhorn's battle: It's the way criticisms of corporate behavior are received in the marketplace. Many, including the SEC, appeared inclined to shoot the messenger. (Even you, dear reader, probably don't like to hear criticism of stocks that you own.) The scary result, Einhorn argues, is that "the cost of open analysis and open criticism [is] much too high for participants." The losers? Investors.

After Einhorn gave his speech, the SEC launched an "informal inquiry" - into Greenlight. When Einhorn testified at the SEC, the "gist of the questions," he writes, was "When did you start manipulating Allied's stock?" The SEC declined to comment.

Another incident: Shortly after Deutsche Bank (DB) analyst Mark Alpert put a sell rating on Allied, he says, the NYSE brought him in for questioning about his report. Alpert left Deutsche Bank on friendly terms after that, and while he says the bank was "fully supportive" of his research, Deutsche Bank did begin to earn millions in fees underwriting Allied's stock offerings after Alpert's departure. Deutsche Bank says the two developments are unrelated.

The lawyer hired by Allied - Lanny Davis, a former special counsel to Bill Clinton - said on CNBC that he had "evidence in the case of several clients" that short-sellers were spreading "false information" and "cashing out." Davis says that he was not referring specifically to Einhorn and that he was on TV to discuss what he says is the general issue of "short and distort."

Einhorn also recounts how Patrick Byrne, CEO of Overstock.com (OSTK), went on a "made-up rant" about Einhorn, his wife, and his business on a conference call in August 2005. Byrne declines to address that charge. Around the same time, Byrne also filed a lawsuit against a hedge fund that was short Overstock's shares and a research firm that had published critical analysis. That tactic has since been copied by other companies. Perhaps not surprisingly, most of the skeptics are now silent. Funny: Back in 2005, one of the SEC's concerns was the "threat of litigation." Turns out actual litigation is acceptable.

Einhorn's book is also timely because these days short-sellers are once again in the headlines, and not in a good way. Lawmakers have urged the SEC to investigate whether short-sellers spread rumors to bring down Bear Stearns (BSC, Fortune 500). It's true that not all short-sellers operate ethically. It's also true that not all longs - as those who own stocks are known - operate ethically. The larger point is that even if a blameless Bear Stearns was crippled by wicked short-sellers - ha! - there's a big difference between spreading rumors and publishing critical research.

Here's the good news. If the SEC can't or won't protect analysts from retribution, you can do your part. Next time you read something critical about a stock you own, instead of lashing out at the author, try to weigh the argument on its merits. That will make you better informed, and one day it might even make you money.