According to a press release published by the company last week, online retailer, Overstock.com, has filed suit against hedge fund Rocker Partners and research firm Gradient Analytics, claiming the companies conspired to drive down Overstock.com’s share price.
The lawsuit, filed in Marin County, Calif., accuses Rocker Partners and Gradient Analytics and several of their employees of collaborating on “tainted and malicious” research notes that the retailer said in the suit contributed to a steep decline in its share price.
“Despite Overstock’s consistently growing revenues and its stock price’s well-justified performance in the market, in the last few months as a result of Gradient’s tainted and malicious (research reports) Overstock’s reputation and stock price have been greatly harmed,” Overstock said in the lawsuit.
In addition, the complaint alleges that Gradient timed the publication of negative research reports on Overstock.com to allow Rocker Partners to adjust its portfolio. The company started issuing reports on Overstock.com in June of 2003, and the complaint alleges the firm issued 58 reports on Overstock.com over a two-year period.
The complaint also claims that Gradient got input for their research reports from Rocker Partners founder David Rocker and portfolio manager Mark Cohodes, who are also named as defendants in the suit, and that Gradient “knowingly serves as a shill” for the hedge fund.
Overstock.com said in their lawsuit that Gradient’s reports were “driven not by objective analysis, but by the undisclosed biases and subjective agendas of hedge funds and others with vested interests in the performance of the targeted companies.”
The New York Post, citing a person familiar with the situation, reported that Gradient had been publishing negative reports on Overstock.com for months before Rocker became a client of the research firm. Overstock.com’s complaint also acknowledges that short sales of Overstock.com started to balloon months before Gradient began issuing reports on the company.
“We are proud of our reputation for providing objective, unbiased, and rigorous investment research to many of the world’s pre-eminent financial institutions. Every day, mutual funds and hedge funds alike rely upon us for our forensic accounting, corporate governance and executive behavior analysis and we regard their confidence in our research as a testament to our research process,” explained Executive Vice President of Gradient Analytics, Matthew Kliber.
In its second-quarter report issued earlier this month, Overstock.com reported a net loss of $2.6 million, or 13 cents per share, wider than the year-earlier loss of $2.4 million or 13 cents. Revenue climbed to $150.6 million from $87.8 million.
Why Should This Case Matter?
We reported on this case for a couple of reasons. First, any accusation that a research firm published reports without fully disclosing material relationships with third-parties who might have a financial interest in the outcome of their research is troubling. The gist of Overstock’s accusations are that Gradient was somehow “in cahoots” with one of their hedge fund clients, Rocker Partners, in an effort to drive down the price of the company’s stock.
We also feel that this case is meaningful because it could potentially tarnish the image of other “independent” research firms. It must be noted that Gradient Analytics is a member of Investorside, the organization that promotes research which is aligned directly with investor’s interests.
It should be noted that the author of this blog post, Michael Mayhew, is on the Board of Directors of Investorside.