Overstock Claims Hedge Fund Kept Shares Low

Overstock.com Inc., a discount Internet retailer, said in a lawsuit that hedge fund Rocker Partners drove down Overstock’s stock price to reap a profit on a bet the shares would fall.

Overstock.com said Rocker and Gradient Analytics, a research firm also named in the suit, used unfair business practices to drive down the price of the stock they had shorted. Short sales are the sale of a security that the seller has borrowed in anticipation of making a profit by paying for it after the price drops.

The lawsuit filed in Marin County Superior Court claims Gradient issued negative reports on Overstock.com based on information supplied by Rocker. The suit claims that short sales of the company’s stock “virtually exploded, mushrooming to almost 7 million shares by June 2005.”

“Short interest in Overstock in general has skyrocketed in the last two years” Overstock.com said in the lawsuit. “It is, therefore, in the Rocker Defendants’ interest for the price of Overstock’s common stock to be depressed.”

Donn Vickrey, executive vice president at Scottsdale, Ariz.-based Gradient Analytics, said the allegations in the complaint were “untrue.”

“We won’t change our opinion regardless of their long or short positions. Our obligation is to provide our opinion,” Vickrey said about contacts with hedge fund clients. Vickrey said the company had not been served with the complaint and had no further comment.

David Rocker, managing partner at Rocker Partners, was on vacation and couldn’t be reached. Mark Cohodes, general partner at Rocker Partners in San Francisco, declined to comment.

James W. Christian, a lawyer for Overstock.com, said the Salt Lake City-based company and shareholders would seek in excess of $500 million. Christian said the negative reports began in June 2003 and that he didn’t have specific dates for subsequent reports available.

Overstock’s shares rose $1.73 to $43.75 on Thursday.