Calif. appeals court weighs Overstock libel suit
Tue Apr 10, 2007 6:03 PM ET
By Michael Kahn
SAN FRANCISCO, April 10 (Reuters) - A California appeals panel on Tuesday weighed whether a lower court erred in allowing Overstock.com Inc.'s <OSTK.O> lawsuit accusing a hedge fund and independent research group of conspiring to drive down the online retailer's stock price.
Lawyers for Rocker Partners and Gradient Analytics Inc. argued the court should have rejected the libel case that has raised fears an Overstock victory could limit free speech for journalists and analysts writing about publicly traded companies.
But justices pointed out during the 90-minute hearing that, at this early stage of the case, the burden on Overstock was not as great as it would be at a full trial.
The online seller of excess inventory sued Rocker and Gradient in 2005, accusing several of their employees of collaborating to produce deliberately false research notes that drove down Overstock's share price and resulted in big profits for Rocker as a short seller.
"It is not time to decide all the layers you are peeling back," Justice Maria Rivera told Gradient's lawyer Steven Hirsch. "The evidence we have now is just skeletal."
Rocker is one of Wall Street's best known short-sellers, credited with spotting early flaws at several companies -- including Belgian speech technology company Lernout & Hauspie -- before their shares crashed.
In a short sale, a person borrows stock and sells it, betting that the share price will go down so the person can then buy it back cheaper and pocket the difference.
The case has drawn close scrutiny from media groups and stock analysts who warn a ruling for Overstock could silence critics of companies with the threat of retaliatory lawsuits.
"Journalists and others who regularly voice their opinions must be allowed to work without the threat of litigation from those who may disagree," said a brief filed with the court in support of the defendants.
Hirsch told the judges Overstock sued because it did not like what the research firm wrote and said simply saying negative things about a company did not amount to libel.
"This is just the sort of information markets need firms to analyze," Hirsch said. "Gradient is free to disagree with the company auditors. If they are not, then you can throw independent research out the window."
The central issue at the hearing was a lower court decision to reject the defendants' motion arguing for throwing out the case on the grounds that Overstock's complaint represented a so-called strategic lawsuit against public participation.
The lawsuit, which seeks unspecified damages, is the first shot fired against the financial community by Overstock Chief Executive Patrick Byrne, who blames Wall Street for a sharp slide in his company's stock price.
In February Overstock sued at least 10 major U.S. brokerages, seeking $3.48 billion in damages for what it called their deliberate attempt to drive its stock price down.
In an October 2005 conference call, Byrne accused hedge funds, journalists and regulators of acting together under the direction of an unidentified "Sith Lord" -- a reference to a villain in the "Star Wars" movies.
Overstock lawyer Theodore Griffinger said at the hearing the case should go forward because the defendants worked together on negative reports about the company they knew were false.
"The Gradient reports were never intended to be objective," he said. "This is not free speech. This is a scheme to drive down stock prices." |
