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10th Circ. Seeks Clarity On Crypto Offering


February 9, 2023

The Tenth Circuit on Thursday questioned attorneys for Inc. and its former executives over why the company pulled the plug on a plan to pay shareholders using cryptocurrency as the appellate court tries to decide whether to revive a lawsuit claiming the “ruse” was intended to squeeze short sellers.

The federal appeals court heard oral arguments in an appeal by one of the short sellers in question, hedge fund Mangrove Partners Master Fund Ltd.

Mangrove is seeking to lead a class of Overstock shareholders who lost money in 2019 on an alleged scheme by the company to artificially inflate its stock price so that recently departed CEO Patrick Byrne could cash out to the tune of $100 million.

The hedge fund firm said the promised digital dividend was withdrawn before shareholders could receive it. But the impact of the planned issuance was to drive Overstock’s stock price upward and hit short sellers like Mangrove, who profit on bets that a company’s stock price will fall.

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But Circuit Judge Joel Carson asked whether Mangrove had a problem with the fact that Overstock didn’t register the dividend.

“The idea that it was unregistered doesn’t make your case?” Judge Carson asked Mangrove attorney Michael Eisenkraft of Cohen Milstein Sellers & Toll PLLC.

“Correct,” Eisenkraft responded.

“I mean, there are a lot of situations where companies might want to have an unregistered security for cost reasons or not having to deal with regulatory authorities,” Judge Carson said.

Eisenkraft said that the problem was not so much that the dividend was unregistered but that, in not registering it, Overstock intended “to essentially put short sellers between a rock and a hard place.”

“It’s the intent to create the artificial price, that is what makes it manipulation,” he said.

Mangrove is also trying to revive allegations that Overstock and its executives hid the financial condition of its retail division by repeatedly revising its retail earnings guidance upward.

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Mangrove Partners is represented by Michael Eisenkraft, Laura Posner, Daniel Silverman, Molly Bowen and Joshua Handelsman of Cohen Milstein Sellers & Toll PLLC and Keith Woodwell and Katherine Pepin of Clyde Snow & Sessions.

Read the article on Law360.