April 22, 2020
While public safety measures to slow the spread of COVID-19 have also slowed some civil proceedings, Cohen Milstein has continued to pursue litigation on our clients’ behalf. Here is a summary of some new securities matters in which the firm has been appointed lead counsel.
The firm has filed a consolidated class action complaint on behalf of lead plaintiff The Mangrove Partners Master Fund Ltd. accusing Overstock.com Inc. and three individual defendants of harming investors by carrying out an unlawful scheme to pump up the faltering company’s share price.
Allegedly led by former CEO Patrick Byrne, defendants used two tactics to inflate Overstock shares: feeding investors false guidance about the retail segment’s profits and engineering a “short squeeze” that forced short sellers to buy large quantities of its stock, according to the March 13 complaint.
Plaintiffs claim the deception allowed Byrne to generate over $100 million by liquidating his stock at artificially high prices and, at the same time, exact revenge on the short sellers against whom he had waged a personal vendetta for 15 years.
Founded by Byrne, Overstock went public in 2002 as an e-commerce retailer but began to struggle within a few years. By 2017, Overstock’s core retail division was highly unprofitable; the company tried to sell it but failed. Around the same time, Byrne shifted the company’s focus from online retail to blockchain technology with the goal of creating a dominant digital platform for securities lending through a business called tZERO. But that venture also failed to generate meaningful profits for the company.
By the start of the class period on May 9, 2019, the complaint alleges, defendants had turned to fraud to prop up the company. On that day, Overstock falsely told investors that the retail division had generated profits for the first time in years and boosted year-end guidance accordingly. After Overstock’s share price rose, Byrne sold 19.5% of his company holdings at a $10 million profit. Two months later, on July 15, 2019, the company again raised year-end guidance.
But defendants had just gotten started. Allegedly guided by Byrne, they hatched a plan to issue a dividend that would manipulate the market and generate a “short squeeze”—a rapid stock price increase that forces short sellers to close their positions by purchasing shares, adding to the upward pressure on the stock. Instead of a typical cash dividend, Overstock announced on July 30, 2019, that the dividend would be in the form of preferred 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, Byrne ordered 200,000 of his shares of Overstock common stock be sold that 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 and secretly increased his July stock sale instructions to liquidate his entire remaining stake in the company. Then, the complaint says, he took off to South America and later Indonesia—a country he noted had no extradition treaty with the United States.
As lenders began to recall their shares and short sellers frantically began to “cover” purchases of Overstock common stock, Overstock shares shot up. At its peak of trading during the day on September 13, 2019 Overstock’s stock price were up 97%, from $15.07 to $29.75, and trading volume increased by 776%, causing investors to purchase Overstock common stock at wildly inflated prices.
From September 16-18, 2019, Byrne secretly sold over 4.7 million shares at inflated prices, yielding another $90 million for himself. Also beginning September 16, Overstock’s share price began to fall as the truth about the scheme—and Byrnes’ stock sales—began to emerge and the frantic covering abated. On September 23, the company’s new leadership admitted that its retail guidance had been false and that another defendant, then-CFO Gregory Iverson, had resigned a week earlier without notice.
By November 12, 2019, after Overstock disclosed that it had received an SEC subpoena seeking documents about the locked-up dividend, the insider trading plans of Overstock’s officers and directors, and communications with Patrick Byrne, the company’s share price closed at $7.78. The case is In re Overstock Securities Litigation, No. 2:19-cv-709-DAK-EJF, (D. Utah).
Following its March 25 appointment as lead counsel, the firm is preparing an amended complaint against Pluralsight, Inc., a high tech “unicorn” company that provides online training courses and other services. The complaint accuses Pluralsight of violating securities laws by failing to disclose problems with its salesforce that would prevent it from meeting its growth projections.
Cohen Milstein represents two public pension funds, the Indiana Public Retirement System and the Public School Teachers’ Pension and Retirement Fund of Chicago, as lead plaintiffs in the class action, which, as currently pled, covers damaged investors who acquired Pluralsight from August 2, 2018 through July 31, 2019.
Shortly before the start of the class period, Pluralsight completed its initial public offering, raising $357 million from investors. Less than a year later, on March 6, 2019, Pluralsight completed a secondary public offering (“SPO”), grossing over $450 million. According to the complaint, the SPO served as a massive cashout for Pluralsight insiders, since all the proceeds went to Company directors, officers, and related parties. In contrast, none of the money raised in the SPO went to fund corporate developments or initiatives.
The original complaint alleges that throughout the class period, Pluralsight misrepresented the company’s business outlook, particularly related to the company’s salesforce and its ability to generate strong growth in billings. Specifically, defendants failed to disclose that Pluralsight was experiencing substantial delays in hiring and properly training the salesforce necessary to meet its lofty billing projections. In addition, the company knew at the time of the March 2019 SPO, that it was behind schedule onboarding new sales representatives, which was hurting sales execution and preventing Pluralsight from meeting its high growth projections. Instead of disclosing such facts at the time of the SPO, defendants intentionally obscured and omitted this relevant information from investors, allowing defendants and other insiders to sell stock at inflated prices.
On July 31, 2019, after the close of the markets, Pluralsight announced disappointing financial results for the second quarter ended June 30, 2019 and said that its billings growth rate had sharply deteriorated from over 40% to just 23% year-over-year. The company blamed its declining growth in billings on sales execution challenges and other issues with its salesforce. Pluralsight also announced that its Chief Revenue Officer was resigning. In response to these disclosures, Pluralsight’s share price plummeted. The stock price fell $12.13 per share in a single day—a nearly 40% drop—to close at $18.56 per share on August 1, 2019.
The case is City of Birmingham Firemen’s and Policemen’s Supplemental Pension System, et al. v. Pluralsight, Inc., et al., Case No. 1:19-cv-00128 (D. Utah).
Deloitte & Touche LLP (SCANA Corporation)
On February 12, U.S. District Judge Margaret B. Seymour appointed the International Brotherhood of Electrical Workers Local 98 Pension Fund lead plaintiff in a case accusing Deloitte & Touche LLP of securities fraud in its auditing of SCANA Corporation, a utility company based in South Carolina.
Cohen Milstein, which was appointed lead counsel in the same order, is preparing an amended consolidated complaint expected to allege that Deloitte & Touche failed to abide by its obligations under Generally Accepted Accounting Practices in its audits of SCANA.
Due in mid-May, the complaint is also expected to allege that Deloitte & Touche’s failure to perform this essential gatekeeping function allowed SCANA and its senior officers to act unchecked in defrauding SCANA investors and South Carolina ratepayers.
The fraud allegations stem from SCANA’s failed $9 billion plan announced in 2008 to build two nuclear reactors in South Carolina in partnership with a state-owned utility, South Carolina Public Service Authority. As currently pled, plaintiffs allege that Deloitte & Touche knowingly or recklessly failed in its responsibilities as auditor by issuing unqualified “clean” audits of SCANA for fiscal years 2014 through 2017.
After SCANA disclosed in 2017 that it was abandoning the decade-long project because it had failed to meet construction deadlines to secure vital tax credits, the company’s stock price fell sharply, closing at $37.39 per share on December 21, 2017, a 50% drop from a class-period high of $76.12 per share on July 6, 2016.
The case is Floyd v. Deloitte & Touche LLP, et al., No. 3:19-cv-03304 (D. S.C.).