Overstock.com Can Sue for Defamation

A publisher who worked with a hedge fund to write negative reports on Overstock.com may be sued for defamation.

A California appellate court found that Overstock.com, Inc., alleged sufficient facts to overcome a motion to dismiss the complaint based upon California’s SLAPP (strategic lawsuits against public participation) statute.

Overstock.com claims in its lawsuit that Gradient Analytics, Inc. produced negative reports on the company at the request of one of its customers who held a short position in Overstock.com’s stock. Overstock.com alleges that these reports contained false and defamatory statements about the company’s financial reports that caused its stock price to decline. Short selling is where someone borrows shares from an investor and sells the borrowed shares at the current market price. The object is for the short seller to later repurchase the stock at a lower price and pay back the person from whom the stock was borrowed, thereby profiting from the falling price.

Gradient argued that the reports were merely opinion based upon fully disclosed facts and were “too inexact or subjective to be proven true or false.” The appellate court found otherwise. “Without question, the reports reasonably could be understood as implying that Overstock changed its accounting methodology in order to boost revenue figures artificially; the change was a substantive violation of GAAP that led to continuing material overstatements of revenue; the company knowingly inflated its cash flow; and the president and CFO resigned as a result of these transgressions. In other words, Overstock was ‘cooking the books’ and manipulating accounting procedures to boost the price of its stock. These implications are strengthened by the sheer flurry of negative reports, as well as by the stylistic emphasis placed on key phrases,” the court found.

The appellate court further found that Gradient’s way of doing business was to allow brokers to order custom reports, to allow the brokers to provide information on the company and request that it be used and to instruct Gradient to produce a negative report. “These special reports were not the product of an unbiased view of the target companies. Instead, the customer paid for a report that would heavily favor its negative view of the target. Nonetheless, Gradient advertised its reports as independent and objective,” the court said. The trial court now will hear the case on its merits.

Overstock.com, Inc. v. Gradient Analytics, Inc., First Appellate District of California, No. A 113397, issued May 30, 2007