=DJ IN THE MONEY: Overstock Suit Likely Delayed By Several Mos
By Carol S. Remond
A Dow Jones Newswires Column
NEW YORK (Dow Jones)--Overstock.com's legal battle against short sellers and a research firm it accuses of colluding with them will need to take major time out.
A California state judge ruled Wednesday that the Salt Lake City online retailer needs to wait until the resolution of appeals filed by hedge fund Rocker Partners LP and research firm Gradient Analytics before Overstock can proceed with the discovery process.
People familiar with the process said it would likely take several months for the appeals to be heard. That means that subpoenas - seeking detailed information about anybody who traded Overstock's securities and already sent by the company to some 70 financial firms - are now on ice.
Overstock sued Rocker and Gradient in Superior Court of the State of California in Marin County last August. The company alleges that Rocker, a hedge fund which often takes bets that stock prices will go down, engaged in unfair practices and colluded with Gradient to produce negative reports with the aim of pressuring Overstock's stock price for profit. Rocker and Gradient have denied any wrongdoing. Last November, they asked Judge Vernon Smith to dismiss the suit under California's anti-strategic lawsuits against public participation, or Slapp, statute. Judge Smith denied Rocker's and Gradient's Slapp motions last month and the companies have since filed notices indicating they will appeal
that decision.
Overstock could ask that Judge Smith's latest ruling in the case be overturn by filing a writ petition with the California Court of Appeals but such petitions are rarely granted.
70 Brokerages Subpoenaed
Overstock last month sent letters informing subpoena recipients that, since the Slapp motions had been denied, the requests for information should now be answered. Rocker and Gradient argued that their notices of appeal automatically
stayed proceedings.
Overstock had argued that it would suffer from any stay in discovery because of the risk that evidence could be destroyed. But Judge Smith, in his opinion, ruled that there is sufficient warning, including letters sent by Overstock to
subpoena recipients, "to protect plaintiff's interests in preserving evidence without the need for a formal protective order."
Overstock Chief Executive Patrick Byrne last year began a very public crusade against what he claims is a vast conspiracy orchestrated by hedge funds and the media to depress his company's stock price. Byrne claims his company has been the target of illegal short selling and that brokerage firms are facilitating the abuse by allowing Overstock's shares to be "naked shorted."
Short sellers typically borrow shares to sell them, hoping that they will be able to replace them with stock bought later at a lower price. Trading without a borrowing agreement is called naked short selling. It is illegal for most
investors, but legal for firms that make markets in stocks and bring liquidity to the market.
Tort Lawyers Lead The Charge
As with several other suits brought by companies alleging that their stocks have been manipulated, Overstock's complaint was brought by a consortium of law firms led by Houston class action lawyer John O'Quinn.
So far, O'Quinn and the consortium of law firms working with him haven't been very successful. Most cases have been thrown out of court by judges who ruled either that the firms were unable to prove their allegations or rejected the
lawsuits on jurisdictional grounds. Other cases are languishing in courts.
O'Quinn's firm last June was singled out by a U.S. District Court judge in Texas and fined $8,250 for submitting questionable claims for silicosis, an occupational lung disease. The federal judge said law firms engaged in mass
screening of potential plaintiffs and created a "phantom epidemic" of silicosis.
A U.S. House panel has also began to investigate the matter.
(Disclosure: Two columnists for Dow Jones & Co. (DJ), this columnist and Herb Greenberg, have received subpoenas from the Securities and Exchange Commission requesting information in connection with an SEC investigation. Dow Jones, publisher of this newswire, objected to the subpoenas. The subpoenas were put on hold and the SEC recently announced new guidelines for requesting information from journalists.)
(Carol S. Remond is an award-winning columnist and one of four who write the "In The Money" feature. Most recently, she won a 2005 Gerald Loeb Award for best news service content with "Exposing Small-Cap Fraud," a series of articles that described how three small companies unscrupulously pumped up their stocks.)
-By Carol S. Remond, Dow Jones Newswires; 201-938-2074;
carol.remond@dowjones.com |
