WASHINGTON (AP) – The Securities and Exchange Commission has completed an investigation of Gradient Analytics Inc. and is taking no action against the research firm in a case that created a furor last year over the SEC’s subpoenaing of journalists.

Gradient and an SEC official said Wednesday that the investigation has been closed. The agency began its probe in late 2005 after online discount retailer Overstock.com Inc. accused Gradient in a lawsuit of issuing negative research reports on the company in exchange for payments from a hedge fund seeking to profit from a drop in its stock price.

Overstock Chairman and Chief Executive Patrick Byrne publicly accused Gradient and the hedge fund, Rocker Partners, of contributing to the decline of Overstock shares through biased reports as the fund was short-selling the stock.

In the course of its inquiry, the SEC subpoenaed three online financial columnists last February for telephone records, e-mails and other material related to Salt Lake City-based Overstock.

The SEC also investigated allegations by Biovail Corp., Canada’s biggest drug maker, that Gradient conspired with short sellers — using biased research reports — to drive down the price of Biovail’s stock.

Gradient made public Wednesday a letter from SEC enforcement official Marc Fagel informing Gradient’s attorneys that the investigation had been terminated without any enforcement action being recommended by the agency staff.

Fagel confirmed in a telephone interview that the inquiry had been closed. He declined to comment further.

‘We are not surprised by the SEC decision,’ Gradient’s president and CEO, Brad Forst, said in a statement. ‘We believe our business conduct has always been conducted with integrity. We cooperated fully with the SEC to demonstrate that we have nothing to hide.’

Said Byrne, the Overstock CEO: ‘We look forward to conducting our own investigation once we get discovery.’ He was referring to the process preceding trials in which the parties can obtain relevant information and documents that are potentially helpful to making their case.

Biovail, in a statement, said the SEC’s move does not affect its lawsuit in New Jersey state court against Gradient and other defendants, from whom it is seeking $4.6 billion in damages. ‘Based on the facts already known to Biovail, it remains confident in the merit of its allegations and of the ultimate success of its claims,’ the company said.

The SEC subpoenas — to Herb Greenberg of MarketWatch, Carol Remond of Dow Jones Newswires and James Cramer, writer of a column for TheStreet.com — came at a time of acute sensitivity over press freedom and government action against journalists, and from a regulatory agency with only civil powers that rarely subpoenas journalists or news organizations.

The SEC’s second subpoena to Scottsdale, Ariz.-based Gradient demanded records related to its contacts with journalists.

The journalists’ employers objected to the subpoenas, and First Amendment advocates publicly criticized the SEC move.

In late February, SEC Chairman Christopher Cox took the unusual step of halting the agency’s pursuit of the subpoenas. He said SEC enforcement attorneys should have consulted him because of the sensitivity of ordering journalists to hand over records.

In April, the SEC announced a new policy on subpoenaing journalists, calling for the agency to avoid issuing subpoenas ‘that might impair the news gathering and reporting functions.’ Under the new guidelines, any subpoena issued to a journalist must be approved by the SEC’s enforcement director.

Rocker Partners wasn’t the only big investor taking a bearish short position in Overstock’s shares, but Overstock filed affidavits from three former Gradient employees alleging that Rocker asked the researchers to include ‘more negative information’ in reports on Overstock and to ‘downplay any positive facts.’ One of them also contended that some reports were withheld for a time so Rocker could make trades in the stock.

In short selling, which is legal, traders sell stock they have borrowed. They then wait for the share price to fall, buy back the shares and return the loan, pocketing the difference.

But Byrne, the Overstock CEO, alleged that his company was a victim of illegal ‘naked shorting,’ in which traders sell stock they haven’t actually borrowed in a bid to damage public companies.

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