Overstock's legal attack on short seller said odd
Fri Aug 19, 2005 03:52 PM ET
By Scott Malone
NEW YORK, Aug 19 (Reuters) - It is not unusual for chief executive officers to get hot under the collar on the subject of short sellers moving in on their shares.
But online retailer Overstock.com Inc. (OSTK.O: Quote, Profile, Research) chose a risky course when it decided to take on a hedge fund in court, securities-law experts said.
On Aug. 11, Overstock filed a suit against hedge fund Rocker Partners and an Arizona-based research firm claiming they conspired to denigrate the company's business for profit. On Thursday, Rocker Partners called the suit "frivolous" and said it planned to counter-sue.
"It's a risky strategy unless they really think that they can intimidate people or scare them away," said Jonathan Macey, professor of law at Yale University. "It brings a lot of attention to the company and to the existence of these short sellers and people are not automatically going to say the company is right and the shorts are wrong."
Short-sellers bet on stocks declining in value. They borrow shares and sell them, hoping to buy them back later at a lower price and pocket the difference.
Overstocks' shares are heavily shorted, with 6.5 million held in short positions last month, representing 31.5 percent of the shares outstanding and more than half the "float," or the shares that trade regularly. On Friday the shares were trading at $41.75 on Nasdaq, off 9 cents for the day and well below their 52-week high of $77.18 set in December.
An attorney for Rocker and a representative of Overstock did not return calls for comment.
In a conference call with investors and the media the day after filing the suit, Overstock President and Chief Executive Officer Patrick Byrne claimed that David Rocker, who heads the fund, was at the center of what Byrne described as a "miscreant's ball" of market participants who Byrne claimed were in cahoots to take down Overstock's shares.
The map included some two dozen hedge fund executives, financial journalists and regulatory agencies who Byrne claimed acted in concert at the behest of an unidentified "Sith Lord" -- a reference to the villains of the "Star Wars" movies.
But some of the people identified on the map said they have never traded Overstock shares and are unsure of why they were named.
Matthew Feshbach, chairman and chief investment officer of MLF Investments LLC, of Belleair Bluffs, Florida, is among the fund managers Byrne put at the center of his map. Feshbach was a prominent short-seller in the 1980s, but after taking heavy losses two decades ago swore off shorting. Today he runs a fund that takes only traditional "long" positions in companies.
In a telephone interview, Feshbach said he had never been involved with Overstock.
"We were short some pretty aggressive companies," he said, referring to his former funds. "We were never sued over it ... It doesn't generally, in my opinion, bode well for companies that are spending a lot of their time on short sellers."
Rocker has been sued once before.
Software company AremisSoft Corp. in July 2001 filed a lawsuit against Rocker, several other hedge funds and online news site TheStreet.com claiming they had conspired to drive down the shares' price. A month later, AremisSoft dropped the suit and in 2002 it declared bankruptcy.
In June 2005, the company's former chief executive officer agreed to pay about $200 million to settle fraud charges brought against him by the U.S. Securities and Exchange Commission. The charges dated back to the time of the suit.
Ehud Kumar, an associate professor of law at the University of Southern California, said it is unusual for companies to take on short sellers in court.
"This company must feel awfully confident going to court with this because, unless they have something hard to show in court, it's like these libel suits. You start them as a plaintiff and end up as a defacto defendant," he added.
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