SEC Queried Analysts Covering Overstock.com on Ties to Rocker
Oct. 27 (Bloomberg) --
The U.S. Securities and Exchange Commission has questioned three former employees of Gradient Analytics Inc. about claims their company conspired with hedge fund Rocker Partners LLP to issue research aimed at pushing down shares of Overstock.com.
The three men said in interviews that the agency queried them this month about statements they made under oath that Gradient, a Scottsdale, Arizona-based research firm, fired them after they asked about the arrangement with Rocker Partners. The statements, posted on the Web site of Salt Lake City, Utah-based Overstock.com, were used to amend a suit the company filed Aug. 11 against Gradient, Rocker Partners and its owner David Rocker.
``The SEC may be investigating this as a variation of the standard `bear raid,' where parties work to drive down a stock,'' said Donald Langevoort, a Georgetown University law professor and former SEC lawyer who isn't involved in the case. ``Even if what an analyst publishes is true, it may be fraud if he fails to disclose a third party's involvement.''
The SEC's queries may help Overstock.com persuade investors that its poor stock performance is due to unfair research rather than bad management, as Gradient and Rocker Partners claim. Overstock.com, which sells excess retail inventory over the Internet, said in the suit that Rocker Partners benefited from negative research through short selling of shares.
Overstock.com shares declined 73 cents to $33.64 at 12:05 p.m. in Nasdaq Stock Market composite trading, after trading earlier today at $33.43, a 52-week low.
Short sales involve stock that a seller borrows in anticipation of making a profit by paying for them after the price drops.
Gradient Unaware of Probe
``We have no direct knowledge of any SEC investigation,'' said Doug Curtis, a lawyer for Gradient. ``Should the SEC choose to contact the company, Gradient looks forward to getting to the bottom of the false allegations that have been circulated by Overstock.com.''
Rocker Partners, which pays $40,000 a year for Gradient reports, has sold Overstock.com shares short. David Rocker, the hedge fund's managing partner, said in an Oct. 14 statement that Gradient wrote its first negative report about Overstock.com a year before Rocker became a Gradient client and said the credibility of the three former Gradient employees is ``seriously compromised.''
Gavin Rooney, a lawyer for Millburn, New Jersey-based Rocker Partners, said, ``There's no reason to believe that the SEC is investigating Rocker Partners. Nobody from the SEC has contacted us formally or informally.''
SEC spokesman John Nester declined to comment.
Gradient, Rocker Denials
Gradient and Rocker deny accusations in the civil suit, which was amended with more allegations Oct. 12. In a letter to customers after the suit was filed, Gradient said, ``Our opinions are not, and never have been, `for hire.'''
Demetrios Anifantis, 30, a former Gradient customer representative, said in an interview that the SEC questioned him earlier this month about an affidavit he gave in September to support Overstock.com's suit.
He said in the affidavit that David Rocker frequently asked Gradient to put more negative information in its Overstock.com reports and that Gradient delayed publication until it had sent Rocker Partners copies. Rocker Partners wanted to ``get their own position in the stock'' before the report was published, Anifantis said.
Anifantis said he regularly took part in conference calls between Gradient executive Donn Vickrey and David Rocker, the hedge fund's managing partner. ``The holding of reports was routine,'' Anifantis said. He didn't say why Gradient would agree to do so.
Fired
Anifantis was fired from Gradient after a year in November 2004. He said the company accused him of sending company documents to his home. He said employees often took their work home and said he was fired because he began asking his superiors about Rocker's influence on its reports.
Daryl Smith and Robert Ballash, former Gradient salesmen, said in telephone interviews that other hedge funds influenced Gradient reports on companies. They declined to name the other hedge funds or the companies. Ballash worked at Gradient for one year; Smith for about 2 1/2 years.
Both men say they were fired shortly after they began asking about the relationship with Rocker Partners. Gradient's explanation for the dismissals was poor performance, the men say. Both are Arizona residents. Gradient declined to comment on the former employees.
``I have some very strong views about this matter which will be expressed in detail in our response to the amended complaint,'' Vickrey said.
Nine-year-old Gradient, which changed its name from Camelback Research Alliance earlier this year, does quantitative and qualitative research on publicly traded companies, including reports on companies that may have earnings problems.
Accurate Reports
Some Gradient negative reports proved accurate. The firm issued warning reports about Krispy Kreme Doughnuts Inc. in 2003. Last year the SEC began an investigation into the company's accounting practices. Its shares have fallen 64 percent this year.
About two-thirds of Gradient's 100 customers are mutual funds. The rest are hedge funds, some of which specialize in short-selling.
Gradient began covering Overstock in 2003 and has been critical of the company. In its latest report, Gradient gave the company's earnings quality an ``F,'' citing concerns about aggressive accounting and the company's disclosure on Sept. 16 that sales had slowed sharply.
``Given the nature of our work, it is no surprise that our views on many of the companies we cover are unpopular in some corners -- particularly among those we have criticized,'' Gradient told customers in a Sept. 28 letter.
Net Loss
Overstock posted an annual net loss four years running. Its shares have fallen 51 percent this year. Of 13 analysts tracked by Bloomberg, one recommended buying the stock, eight recommended holding it and four recommended selling.
Overstock.com President Patrick Byrne, who was replaced as chairman by his father Oct. 25, has complained that his company has been damaged by short selling.
In an Aug. 12 Webcast announcing his lawsuit, Byrne described a conspiracy among investors, reporters and others to push Overstock's shares down and said the plot was being orchestrated by a unidentified mastermind he called the ``Sith Lord'' a reference to the arch-villains in the Star Wars films.
He said the SEC had questioned his general counsel earlier this month about the three men's affidavits.
The case is Overstock.com Inc. v. Gradient Analytics Inc., CV053693, Superior Court of California, County of Marin.
To contact the reporters on this story:
Karen Gullo at kgullo@bloomberg.net or
Demian McLean in Washington at dmclean8@bloomberg.net.
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