Overstock.com sues hedge fund
Overstock.com claims a hedge fund and a research firm conspired to drive down its share price.
August 12, 2005: 2:27 PM EDT
By Amanda Cantrell, CNN/Money staff writer
NEW YORK (CNN/Money) - Overstock.com, an online retailer, has filed a complaint against hedge fund Rocker Partners and research firm Gradient Analytics, claiming the companies conspired to drive down Overstock.com's share price.
The complaint, filed in Marin County, Calif., alleges that Gradient is closely aligned with various hedge funds, including Rocker Partners.
In addition, it alleges that Gradient withheld publication of negative reports on Overstock.com to give Rocker Partners time to adjust its portfolio. The company started issuing reports on Overstock.com in June of 2003, and the complaint alleges the firm issued 58 reports on Overstock.com over a two-year period.
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The complaint claims Gradient got input from Rocker Partners founder David Rocker and portfolio manager Mark Cohodes, who are also named as defendants in the suit, and that Gradient "knowingly serves as a shill" for the hedge fund.
Gradient had been publishing negative reports on Overstock.com for months before Rocker became a client, however, according to a report in The New York Post, which cited a person familiar with the situation.
Overstock.com's complaint acknowledges that short sales of Overstock.com increased markedly months before Gradient began issuing reports on overstock.
Overstock.com alleges Gradient's reports were influential in driving the company's stock price down from its January 2005 high of $77.18 to its closing price yesterday of $45.43, according to the complaint. The company alleges that short sales of its stock have "virtually exploded," reaching seven million shares by June 2005.
"Legitimate shorting is a fair, honorable, legitimate way to conduct business. I have no beef with anybody for short selling – more power to you," Patrick Byrne, Overstock.com's founder and president, told CNN/Money. "What irks me is discovering that there has been some person paying an allegedly independent analyst group to doctor their research."
Overstock.com said its revenues are consistently growing and that its stock price had performed well in the market before publication of the research. But short sellers have been critical of the company. Overstock.com reported a net loss of $2.5 million in the second quarter, compared to a net loss of $2.3 million a year earlier. Revenue grew 72 percent from the year-earlier quarter.
Byrne said the company may file similar actions in the future if its investigations reveal what it feels to be unfair practices.
"We are going to pursue discovery aggressively and follow the rabbit trail of unfair business practices wherever it leads," Byrne said.
"There is a fraud going on in this country where offshore hedge funds dwelling in an unregulated environment are selling massive numbers of shares short and doing various schemes not to cover (their short positions)," said Wes Christian, a partner at law firm Christian Smith and Jewell, one of the firms representing Overstock.com, referring to the fact that shares previously sold short have to be repurchased in order to close the open position. "In the process, companies are getting destroyed, technology is getting destroyed, and hard working Americans are getting screwed."
Short sellers have argued that they are protecting ordinary investors by exposing fraudulent practices at companies. One oft-cited example is famed short seller James Chanos' exposure of the massive fraud at Enron.
Rocker is one of a small group of hedge funds that employ short selling as their primary strategy. Short selling involves borrowing a stock and selling it with the intent of buying it back later at a lower price, profiting from the drop in stock price. These managers short the stock of companies they believe to be overvalued.
Rocker is one of the best known short sellers, having founded Rocker Partners in 1985, when relatively few hedge funds existed. Today, there are an estimated 8,000 hedge funds.
Rocker Partners did not return a call before press time, and Gradient declined to comment.
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