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Overstock Securities Lawsuit: Utah Court Tosses Class-Action Claims

A Utah federal district court judge has dismissed with prejudice a class-action lawsuit against online retailer Overstock and two former executives alleging securities law violations.

It was the case’s second such action, and the dismissal with prejudice bars the plaintiffs from any further litigation.

Lead plaintiff The Mangrove Partners Master Fund filed the class-action lawsuit in September 2019, also naming founder and former CEO Dr. Patrick Byrne and former chief financial officer Gregory J. Iverson in the legal complaint.

The complaint alleged that the defendants made false statements about the online fashion and home goods seller’s financial projections for 2019 and also charged that the issuance of a security token as a digital dividend was a scheme to cause an artificial squeeze on short sellers.

Short sellers borrow stock from a brokerage, sell the shares when they think the stock price is high, and purchase the shares back when they believe the stock price is low—at which point they return the newly purchased shares back to the brokerage firm. If short sellers guess right, they make a profit. If they guess wrong, they end up with a loss. A dividend issued on stock that the short seller has borrowed requires the investor to pay that dividend to the lender. If the investor can’t, then it is obligated to purchase the shorted stock to cover its short.

Mangrove, an institutional investor, is a “well-known short seller,” according to the court decision Judge Dale A. Kimball issued Tuesday.

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But the case had already been decided back in September last year. In that decision, Judge Kimball had granted defendants’ motions to dismiss after ruling that issuing the security token did not manipulate the market. The fudge found that statements on Overstock’s financial projections for 2019 were protected by the Private Securities Litigation Reform Act.

But an interesting twist is that Judge Kimball reversed his own ruling after noting that he overlooked a footnote in which the plaintiff requested permission to amend the complaint if the case was rejected.

With the opportunity for a second bite at the apple in hand, Mangrove filed an amended complaint that included new evidence from unnamed witnesses. Some facts from the original complaint remained unchanged. Essentially, the suit claimed that Overstock was losing market share to e-tail home furnishings competitor, and allegedly had committed to losing billions of dollars to eventually control the market. The lawsuit further charged that when the company realized it was “nearly impossible” for Overstock to return to profitability, it “embarked on a blockchain strategy designed to profit on new markets for crypto currency.” The suit also alleged that the defendants had manipulated the market by issuing a security token called a “digital dividend” to shareholders last year.

By the time the lawsuit was filed on Sept. 23, 2019, Byrne had already resigned the prior month, and Iverson left one month later, about one week before the suit was filed. Both resignations were within the class period of the alleged securities violations. Mangrove alleged that the digital dividend was issued to increase Overstock’s share price at the time when Byrne parted ways with the company over the probable disclosure of his relationship with a Russian spy.

After Byrne left, he sold over 4.7 million shares for $90 million, according to Tuesday’s court decision. Judge Kimball noted that the Securities and Exchange Commission (SEC) had launched a probe into the activities of Overstock and executives. Separate from the court case, Overstock said in February that the SEC issued a new subpoena for additional documents. The company said it was cooperating with the SEC’s probe and had provided the requested documentation.

One problem Judge Kimball had with the new information in the amended complaint was its attribution to an unnamed individual, with no details provided on this person’s job title, dates of employment, or job description. The lack of specificity even extended to what role the individual supposedly played in the “2019 planning process.” Judge Kimball concluded that this supposed witness didn’t meet the law’s standards of reliability.

A second confidential witness addressed possible misstatements about SEO (search engine optimization) claims when they were made, but the court found that nothing was presented to support those challenges. As for the market manipulation claim, Judge Kimball said the amended complaint failed to add any new allegations suggesting that the digital dividend or the disclosures regarding it were deceptive. Consequently, there was no need to change the court’s prior analysis.

“It is gratifying that the Utah District Court agreed with our arguments and again dismissed the complaint,” Overstock CEO Jonathan Johnson said.