Overview
Plaintiff brings this action against Overstock, its former Chief Executive Officer, Patrick M. Byrne, it’s former Chief Financial Officer, Gregory J. Iverson, and its current Retail President, David J. Nielsen, for making numerous materially false and misleading statements and omissions and engineering a market manipulation scheme during the Class Period in violation of the Securities Exchange Act. Specifically, Plaintiff alleges that Defendants intentionally orchestrated a “short squeeze” in the Company’s common stock in order to harm short sellers and misled investors about the Company’s retail guidance. In addition, Plaintiffs charge Overstock’s former CEO with selling his personally held Overstock shares for over $100 million in proceeds while in possession of material adverse information that was not disclosed to shareholders.
The complaint was filed on behalf of The Mangrove Partners Master Fund, Ltd. and all other purchasers of Overstock.com Inc. common stock between May 9, 2019 and November 12, 2019, inclusive (the “Class Period”), who were damaged by Defendants’ fraud.
On January 6, 2020, the Court appointed Mangrove sole Lead Plaintiff and Cohen Milstein sole Lead Counsel. On September 20, 2021, the District Court granted Plaintiffs’ motion to dismiss the complaint.
Important Dates & Rulings
On February 2, 2022, Cohen Milstein filed an appeal in the United States Court of Appeals for the Tenth Circuit, seeking to reverse the United States District Court for the District of Utah’s dismissal of its securities fraud class action complaint against Overstock.com and current and former Overstock executives.
- The National Conference on Public Employee Retirement Systems (NCPERS), the Utah Retirement Systems, the Public Employees Retirement Association of New Mexico, the Fire and Police Pension Association of Colorado, the Oklahoma Firefighters Pension & Retirement System, the Oklahoma Law Enforcement Retirement System, and the Oklahoma Police Pension and Retirement System filed an amicus brief in support of appellant shareholders. The brief argued that the District Court erred in determining that, because the Lead Plaintiff engaged in short selling, its investment decision could not be presumed to rely on the integrity of market prices.
- Public interest organizations Better Markets, Inc. and the Consumer Federation of America also filed an amicus brief. The organizations disputed the District Court’s ruling that deception is a necessary element of a claim of market manipulation under Section 10(b) of the Securities Exchange Act of 1934 and explained the negative implications of such a requirement, were it imposed.
- A third amicus brief was filed by law professors Joshua Mitts, Robert J. Jackson Jr., Donald C. Langevoort, Edward F. Greene, John C. Coffee, Jesse M. Fried, Joel Seligman, David H. Webber, James D. Cox, Randall S. Thomas, Daniel J. Taylor, Frank Partnoy, Minor Myers, and Marc I. Steinberg. In their brief, the professors argued that the District Court erroneously found that deception is a necessary element of a claim of market manipulation and that, even if it was, market manipulation that impacts the supply and demand of a security is intrinsically deceptive.
Case Background
Overstock (NASDAQ: OSTK) is an e-commerce retail company founded by Defendant and former Chief Executive Officer, Patrick M. Byrne. It went public pursuant to an initial public offering in 2002. Just three years after it went public, however, Overstock began to struggle, and its stock price began to slide.
By 2017, Overstock was in peril. Its core retail e-commerce business (the “Retail division”) was highly unprofitable. Overstock attempted, but failed to sell the division. Around the same time, former CEO, Byrne, shifted Overstock’s focus to a new business – Medici Ventures, a subsidiary of Overstock with numerous blockchain technology businesses under its umbrella. tZERO is the flagship business within Medici Ventures, and is the home of an alternative trading system (“ATS”). Byrne’s goal was to create a digital platform that would substitute for existing security lending markets. Unfortunately, tZERO, fared no better than Overstock’s Retail division.
Plaintiffs allege that given Defendants inability to fix Overstock’s businesses legitimately, Defendants turned to fraud starting at the beginning of and through the Class Period, including:
On May 9, 2019, Overstock falsely told investors that the Retail division was purportedly EBITDA positive for the first time in years, and its profitability had grown so rapidly that Overstock increased year-end Retail Adjusted EBITDA guidance by 50% – from $10 million to $15 million. Predictably Overstock’s shares rose based on this unexpected news of this financial turnaround. At this time, Byrne sold 19.5% of his Overstock holdings for a profit of $10 million.
Two months later, on July 15, 2019, Defendants raised the Retail division’s Adjusted EBITDA guidance even higher – from $15 million to $17.5 million, reflecting a 75% increase over the Company’s initial $10 million projection. They then reiterated this guidance again on August 8, 2019.
Defendants, allegedly guided by Byrne, hatched a plan to issue a dividend that would manipulate the market and generate a “short squeeze,” i.e., a rapid stock price increase, which forces short sellers to close their positions by purchasing shares, adding to the upward pressure on the stock. But instead of issuing a typical cash dividend, Overstock announced on July 30, 2019, that the dividend would be in the form of referred shares issued as a blockchain-based digital “security token” available only through Overstock’s own blockchain trading platform, operated by tZERO. At the same time of this announcement, Plaintiffs allege, Byrne ordered 200,000 of his shares of Overstock common stock be sold in September, when entitlements to the Locked-Up Dividend were set to be issued and the stock price would inevitably spike.
On August 22, 2019, Byrne resigned as CEO. At that time, Plaintiffs allege, he secretly increased his July stock sale instructions from 200,000 shares to his entire remaining stake. Then, Byrne allegedly absconded to South America and later Indonesia – a country he noted had no extradition treaty with the United States.
As predicted, as lenders began to recall their shares and short sellers frantically began to make “cover” purchases of Overstock common stock, Overstock shot up. At its peak of trading during the day on September 13, Overstock’s stock price shot up 97%, from $15.07 to $29.75, and trading volume increased by 776%, from 2,122,416 to 18,613,100 shares traded, causing investors to purchase Overstock common stock at wildly inflated prices.
Between September 16 to 18, 2019, Byrne secretly sold over 4.7 million shares at this inflated price, yielding him over an additional $90 million.
On September 16, 2019, Bloomberg published an article entitled “How Patrick Byrne’s Final Act at Overstock Crushed Short Sellers,” explaining that the Locked-up Dividend caused massive purchasing by short sellers who were being forced to cover their positions, causing Overstock’s stock to plummet by 20.8%.
Following further articles and allegedly cavalier blog pots by Byrne, Overstock’s stock continued its precipitous fall, closing at $17.60 on September 17, 2019, an additional 10.9% decline from the previous day to closing at $16.19 on September 18, 2019, an additional 8% decline from the previous day.
After the market closed on September 18, 2019, Byrne publicly revealed his sales. A Form 4 was filed for Byrne revealing his total liquidation of his Overstock common stock between September 16 and 18, 2019 for over $90 million. On this news, Overstock’s price dropped again, closing on September 19 at $15.57, an additional 3.8% decline.
Then, on September 23, 2019, Overstock’s new leadership admitted that its Retail guidance was false, revealing that third-quarter 2019 Retail Adjusted EBITDA was only break-even – dramatically reversing the supposed progress towards profitability touted by the Company under Byrne. Retail Adjusted EBITDA for the year was ultimately negative $2.2 million, a far cry from the $15 million and $17.5 million guidance that Defendants provided during the Class Period, further demonstrating the falsity of those claims. The company also revealed that its director’s and officer’s insurance premiums would significantly increase, and that Iverson had resigned a week earlier on September 17, effective immediately and with no notice. These revelations caused Overstock’s share price to fall an additional 25%, from $14.97 on September 20, 2019 to $11.19 at the close of trading on September 23, 2019 – Overstock stock’s worst day in more than a decade and second worst single-day performance in the Company’s history.
The final fallout from Defendants’ fraudulent activities came on November 12, 2019, when Overstock announced that it had received a subpoena from the SEC seeking documents relating to the Locked-up Dividend, the insider trading plans of Overstock’s officers and directors, and communications with Patrick Byrne. On this news, the Company’s share price dropped more than 17%, from $9.42 at close on November 11, to $7.78 at close on November 12.
By this action, Lead Plaintiff seeks to recover damages for the substantial losses suffered by the Class as a result of Defendants’ materially false and misleading statements, omissions, and manipulative scheme.