Online retailer Overstock can breathe a sigh of relief as it appears that a long-standing fraud case is beginning to wrap up. Earlier this week, Bloomberg Law reported that U.S. district judge Dale Kimball from Utah had thrown out a class-action lawsuit against the company concerning a digital dividend issue that it had conducted.
Investors Want Answers
According to the report, the judge found no wrong in Overstock’s action, explaining that the company’s dividend issue was legally protected and hadn’t caused any discernible disruption in the market. Thus, the case had no merit.
The case originated from Mangrove Partners Fund – an Overstock investor – who filed a complaint against the company and two of its executives, former CEO Patrick Byrne and CFO Greg Iverson. Accusing the entities of securities fraud, the case alleged that they had designed Overstock’s digital asset dividend to punish short-sellers.
Overstock’s digital dividend, which the company called “Digital Voting Series A-1 Preferred Stock,” went for offering in July. The dividend traded on the firm’s blockchain platform, although it carried a clause – investors wouldn’t be able to trade it at all for six months. In his complaint, the investor pointed out that this system was designed to tamper with Overstock’s stock price.
“While shares traded to a Class Period high of $26.89 each on September 13, 2019, they traded to as low as $15.50 by September 18, 2019, three trading days later, after investors learned that the tZERO dividend was designed to be a short squeeze,” the complaint pointed out.
It added that Byrne and Iverson had violated Section 10(b) of the Securities Exchange Act, which covers antifraud provisions of securities swaps. Byrne was also accused of violating Section 20(a) of the same act, since he was the dividend’ controlling person.
No Merit to the Case
Along with the accusations of securities fraud, the suit also accused Byrne, Iverson, and current Retail President David Nelson of violating securities laws amid Byrne’s departure from the company last year. The company subsequently liquidated a fifth of its shares.
As it explained, the firm issued misleading year-end projections on tZERO, its security exchange. This way, it managed to drive up its stock price and allowed Byrne to cash out at a premium. News of the digital dividend did help Overstock’s share price, as it managed to rise by about 97 percent. As the suit alleged, it helped Byrne to earn over $90 million in profits.
In his judgment, however, Judge Kimball explained that these allegations were false. He added that the Private Securities Litigation Reform Act protected Overstock’s revised earning statements.
“On the day that Overstock announced the dividend, market observers recognized and publicized that the digital dividend would place short sellers in a pickle by forcing them to cover their short positions to avoid breaching pre-existing contractual obligations,” the judge explained.
The judge pointed out that Byrne has had a public history of making disparaging comments about short sellers. However, that wasn’t relevant to the case, as Overstock had a legitimate business purpose for issuing its dividend.