IN THE MONEY:Rocker To Countersue Overstock As Discovery
1 November 2007
14:33
Dow Jones News Service
English
(c) 2007 Dow Jones & Company, Inc.
By Carol S. Remond
A Dow Jones Newswires Column
After meandering in the California court system for more than two years, a libel case brought by online retailer Overstock.com (OSTK) against a hedge fund and a research firm it accuses of colluding against the company is about to kick into high gear.
But while Overstock Chief Executive Officer Patrick Byrne recently rejoiced that a decision by the California Supreme Court not to review petitions in the case opened the door for the discovery process to begin, he might soon have to disclose more than he anticipated.
That's because, according to people familiar with the situation, Rocker Partners LLC and Gradient Analytics Inc. are poised to file counterclaims against the company. Rocker is expected to file its counterclaim on Friday. Gradient's timing is unclear.
Overstock sued Rocker and Gradient in Superior Court of the State of California in Marin County in August 2005, alleging that the short selling fund and research firm engaged in unfair practices and conspired to produce negative reports to depress its stock price for profit.
Rocker, which was renamed Copper River Management after the retirement of founder David Rocker, and Gradient have denied wrongdoings, claiming that Overstock is simply trying to silence critics.
In September, after the state supreme court denied its petition for review, Gradient said that California had given companies "the tools to stop critical analysis of their financial practices by market analyst, researchers, journalists and others."
Rocker and Gradient had long said that they would file their own claims against Salt Lake City-based Overstock, but those plans seem to have been put on hold while they tried to have the case dismissed. Now that the crucial phase of discovery is about to begin - each party will ask the other to produce documents and information that they believe is supportive of their claims - Rocker's and Gradient's legal teams are shifting into a more offensive mode.
People familiar with the matter said Rocker will allege in its counterclaim that Overstock and its CEO orchestrated a short squeeze to boost the company's stock in violation of a California securities statute. The fund is likely to claim that Byrne made false statements, perhaps through the use of Internet bloggers, in order to inflate the price of his company's stock in violation of California Corporations Code.
Rocker will allege that the massive run-up in Overstock's price in the second half of 2004 and early 2005 caused the fund to lose money by forcing it to cover, or buy back shares, at artificially higher prices.
Short sellers bet on falling stock prices. They typically borrow shares to sell them, hoping that they will be able to replace them with stock bought at a lower price later.
Rocker's counterclaim against Overstock will be similar to that brought by the fund against bankrupt Belgian speech technology company Lernout & Hauspie back in December 2000. That suit is still ongoing.
In its complaint against L&H, Rocker alleges it lost tens of millions of dollars when it had to cover its short position at higher prices because L&H fraudulently boosted its stock price by releasing fraudulent information in the market.
L&H filed for bankruptcy protection in November 2000 amid a burgeoning accounting scandal. The company later admitted fabricating a large portion of its sales.
Rocker hired law firm Boies, Schiller & Flexner earlier this year after a California appeals court in May denied a motion to dismiss Overstock's suit.
The short fund declined to comment on its plans.
Overstock is not the only company taking aim at hedge funds and research firms. Canadian companies Biovail Corporation (BVF) and Fairfax Financial Holdings (FFH) filed suits against several funds and research analysts in New Jersey state court in 2006. The Biovail complaint doesn't named Rocker as a defendant but Fairfax' does. All three companies are under investigation by the Securities and Exchange Commission.
(Carol S. Remond is an award-winning columnist who won a Gerald Loeb Award in 2005 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; 303-997-5783; carol.remond@dowjones.com [ 11-01-07 1533ET ] |
