Overstock.com Investor

Lawsuit (CEO's Crusade)


Feb 2, 2007 Overstock.com files Lawsuit against Prime Brokers
Sept 12, 2006 Overstock.com's comments on proposed amendments to Regulation SHO
(Click here to see all public comments on the SEC's website)
Aug 15, 2006 California Attorney General's Amicus Brief against Rocker and Gradient Appeal
Mar 7, 2006 Final Ruling on Gradient’s Demurrers and Motions to Dismiss
Jan 3, 2006 Opposition to Gradient Demurrer
Jan 3, 2006 Opposition to Rocker and Gradient Anti-SLAPP Motions
Jan 3, 2006 Opposition to Rocker Demurrer
Jan 3, 2006 Opposition to Rocker Affidavit
Dec 27, 2005 Declarant SEC Letters
Dec 9, 2005 Wilmer Culter Withdrawal
Oct 12, 2005 Amended civil complaint against Rocker Partners and Gradient Analytics
Oct 12, 2005 Declaration of Demetrios Anifantis
Declaration of Demetrios Anifantis
Oct 12, 2005 Declaration of Robert Ballash
Declaration of Robert Ballash
Oct 12, 2005 Declaration of Daryl Smith
Declaration of Daryl Smith
Aug 11, 2005 Civil Complaint against Rocker Partners and Gradient Analytics

Date Event
Feb 20, 2007 Overstock SVP Jonathan Johnson interviewed on Steven Rinehart radio show regarding naked short selling
Nov 24, 2006 Overstock.com CEO interviewed on Bloomberg Television
March 26, 2006 Biovail story on CBS's 60 Minutes
Feb 23, 2006 Robert Shapiro discusses naked short selling on CNBC
Dec 19, 2005 Patrick Byrne on CNBC Squawk Box
Nov 30, 2005 Overstock.com President, Patrick Byrne, Issues Statement Regarding NASAA Public Forum on Naked Short Selling
Nov 17, 2005 Overstock.com Responds to Rocker's and Gradient's Motions
Nov 16, 2005 Gradient request to stay discovery
Oct 14, 2005 Interview: Refco crisis and illegal 'naked short selling'
Oct 12, 2005 Overstock.com Files Amended Complaint Against Rocker Partners and Gradient Analytics
Oct 5, 2005 The Motley Fool: "Overstocks Three Affidavits"
Aug 17, 2005 Overstock.com's President Debates Jeff Matthews About Rocker Lawsuit on CNBC
Aug 12, 2005 Overstock.com's President Discusses Naked Short Selling on CNBC
Aug 11, 2005 Overstock.com Files Lawsuit Against Rocker Partners and Gradient Analytics
Aug 11, 2005 Overstock.com Webcast Regarding August 11 Lawsuit
Printable Slides
Conference Call Transcript

Overstock.com vs. Gradient Analytics, Rocker Partners, et al.

What is Overstock's lawsuit against Gradient Analytics and Rocker Partners about?
Our lawsuit claims that 1.) Rocker paid Gradient for a series of false and disparaging reports about Overstock, 2.) Gradient allowed Rocker to review and edit the so-called "independent" reports before releasing them, and 3.) Gradient timed the release of the reports so that Rocker could profit on trades, as could Gradient (through hedge funds it secretly controlled)

How does Overstock know this occurred?
Eight former Gradient employees who witnessed the illegal conduct have come forward with affidavits and testimony explaining how Gradient, Rocker and Herb Greenberg of MarketWatch.com, carried out the fraud. Three of the affidavits have been made public and are available at our Lawsuits Page .

We also have other supporting information that we are not disclosing publicly at this time.

Why did Overstock file the lawsuit?
What Gradient and Rocker are doing is illegal and harms Overstock investors and, at least as importantly, the public markets in general: we have a fiduciary and social duty to fight it.

Gradient Analytics issued a statement that it has become the subject of a "non-stop intimidation and harassment campaign" orchestrated by Overstock.com Inc. Chief Executive Patrick Byrne. How do you respond?
Gradient's statement was shameless rhetoric. Gradient has written reams of false reports on Overstock and conspired with at least one journalist to denigrate our business; yet, now that we have a voice in court, Gradient claims harassment and intimidation. If Gradient has done nothing wrong, then it should welcome the discovery phase of our lawsuit: let the facts speak for themselves.

Failure to Deliver (aka Naked Short Selling)

What is a "failure to deliver"?
A failure to deliver occurs when someone sells a share of stock, but does not deliver it to the purchaser - even after the purchaser has paid for the share.

What is "naked short selling?"
Naked short selling is an illegal stock manipulation tactic whereby a short seller sells a share of stock without borrowing it, thus creating a failure to deliver and phantom shares in the stock market. Done in volume, naked short selling can dilute shares of a target company's stock, artificially driving down its stock price.

How do you know failures to deliver are occurring and that Overstock's stock is being naked shorted?
Both the NYSE and NASDAQ say that it is. The SEC now requires the NYSE and NASDAQ to publish a list, updated daily, of companies whose stocks have unusually high volumes of trades that fail to deliver. The list is called the Reg SHO Threshold list, and under Reg SHO, no company should be on the list for more than 13 days: Overstock has been on the list for more than 200 days.

NASDAQ Reg SHO Threshold Security List: http://www.nasdaqtrader.com/aspx/regsho.aspx

NYSE Reg SHO Threshold Security List: http://www.nyse.com/Frameset.html?displayPage=/threshold/

There are other indications as well. Recently, Overstock's president, Patrick Byrne, and its Chairman, Jack Byrne, each purchased several thousand shares of Overstock, but their brokers could not settle the trades over several weeks.

How big of a problem is naked short selling?
We don't know - the SEC, NASDAQ, and the DTCC all refuse to disclose the daily volume of failures to delver in Overstock's stock, or in the overall market. We know Overstock has sold just over 19 million shares to the world, but that the world seems to own between 35 to 40 million shares of Overstock. The SEC has also acknowledged that there are at least $6 billion worth of failed trades in U.S. capital markets every day.

The amount of abusive naked short selling occurring could be vast.

If it is illegal, why aren't regulators trying to stop it?
We've learned that state and federal agencies are looking into abusive stock trading practices, naked shorting being one of them, and the people behind it. We do not know the nature or extent of their investigations.

Isn't it really just the case that you're trying to silence your critics?
No. We have many critics and welcome honest criticism. We're standing up to criminals engaged in illegal activities that harm Overstock, Overstock investors, and our capital markets.

Is it that you're angry with short sellers?
Short selling is a legitimate and legal investment strategy; naked short selling is illegal. Likewise, collusion among "independent" analyst firms, hedge funds, and reporters, is also illegal.

How does naked short selling affect Overstock?
It does not affect Overstock's operations. However, the affect is this: Overstock has sold just over 19 million shares to the world, but the world seems to own 35 to 40 million shares. If that is so, shares held by legitimate owners of Overstock are potentially worth half their true value. We feel a fiduciary duty to fix that.

How do failures to deliver and naked short selling relate to your lawsuit against Gradient Analytics and Rocker Partners?
It doesn't. Naked short selling and Overstock's lawsuit against Gradient Analytics, Rocker Partners, et al. are two separate matters - at least until we learn more in discovery.

Overstock.com's Performance

How can short-sellers/hedge funds push down the valuation of a stock unless the company has some fundamental weaknesses?
One way would be through false rumors, misinformation and innuendo distributed by compliant analyst firms such as Gradient and business journalists such as Herb Greenberg; another way could be through creating failure to delivers, which causes artificial dilution of a company's stock price.

Both are illegal regardless of Overstock's performance, and both can artificially push a stock lower than the natural market would price it.

Think of it this way. Company X reports bad news and some investors decide to sell. In a natural market the stock might decline to $N: with the added affect of failing to deliver, the stock can be artificially pushed down to $N-1, $N-2, or to almost any price the miscreants desire. While it is true the company?s stock declined due to market forces, the illegal manipulation drives the price down even further ? and it is no less illegal.

How do you respond to the sentiment, "When I hear CEOs complaining about their stocks being shorted, I wonder why they're not doing a better job of tending to their business?"
We have never complained about our stock being shorted - short selling is a legitimate and legal investment strategy. Our lawsuit claims that Gradient timed the release of false, negative reports (paid for by Rocker and reviewed and edited by Rocker prior to release) so that Rocker could profit on trades.

Separately, Overstock's president, Patrick Byrne, has spoken out about naked short selling because he believes it harms ordinary investors and entrepreneurship in America. Both, by the way - failing to deliver and collusion among analyst firms, hedge funds and reporters ? are illegal regardless of how Overstock performs. Thus, the statement and the question are misguided. Moreover, the SEC issued subpoenas on its own, so it must know something the rest of us do not.

What is Dr. Byrne's response when Greenberg and others say he is raising alarms about short-sellers, naked trading and crooked journalists only to distract attention from the company's troubled financial performance?
Respectfully, that is absurd. Overstock is a public company: we are audited and required to report our results quarterly. In addition, Patrick writes lengthy letters to shareholders describing in detail what happened to their business each quarter. If Gradient, Rocker, Greenberg, hedge funds, and the DTCC were all required to be as transparent as we are, everything would be right in the world (and investors could have confidence in our capital markets again).

I would also argue with the position that Overstock's financial performance is troubled. In just six years, Overstock has grown from $1.8 million in sales (1999) to $804 million in sales (2005), while losing under $100 million: that is remarkable. Few companies have achieved such growth so efficiently and on as little capital. In fact, when Amazon.com passed the $1 billion mark, it lost $720 million on sales of $1.6 billion, and had $1.4 billion in debt; while at $800 million in sales, Overstock lost only $25 million and ended 2005 with $75 million of debt. We couldn't be more proud of our accomplishments.

How much should Overstock's stock be worth?
That is for the market to decide - a fair, untainted, transparent market, not miscreants manipulating it.

Patrick and Business Journalists

Was Overstock behind the SEC subpoenaing business journalists?

Has Overstock been subpoenaed?
Yes. We received a subpoena from the SEC on May 9, 2006. Prior to receiving the subpoena, we were already cooperating fully with various agencies, including the SEC.

Is Overstock being investigated by the SEC or other agencies?
The SEC is conducting an investigation on Overstock.com (see previous question). We are not aware of other investigations by any other agencies."

Are the subpoenas an infringement on these journalists' First Amendment rights?
Again, Overstock is not behind the subpoenas and we do not know what the subpoenas are about. That said, in our view, the First Amendment is sacrosanct and journalists (or anyone else for that matter) should be free to write or say whatever they want. There is a clear difference, though, between free speech and illegal conduct: journalists are not above the law and should not be permitted to hide behind the First Amendment while engaging in illegal conduct.

What does your company's president have against financial journalists?
He has nothing against financial journalists in general. A few financial journalists' reporting on Overstock appears to be deliberately biased, misleading or dishonest, and based on rumor and speculation, not facts. We've also learned that at least one writer - Herb Greenberg of MarketWatch.com - may have intentionally and falsely disparaged Overstock so that David Rocker could profit on his short position in Overstock.

"Miscreants' Ball" and the Sith Lord

What was the purpose of Patrick's "Miscreants' Ball" presentation?
The purpose of the conference call was to lay out our lawsuit and what we knew about Gradient's and Rocker's activities, as well as to provide broader context surrounding the suit.

Since that presentation, the company president has been portrayed by some journalists as a conspiracy theorist. How do you respond?
Dr. Byrne's conference call clearly hit a nerve. How else could one explain the concerted and vicious retaliation it drew? Those who say Dr. Byrne is a conspiracy theorist are simply trying to obfuscate the issue and protect a corrupt system that enables virtually risk free profits at the expense of entrepreneurial businesses and ordinary, hard working investors.

Anyone following this is advised to tune out the rhetoric and look at the facts, then decide for themselves.

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