Overstock.com Settles Short Sales Litigation

JERSEY CITY, N.J. (CN) - Overstock.com's long-running legal feud with Goldman Sachs has likely reached its final chapter, with the retailer settling with the financial giant over their "naked short sales" of the company's stock.

Salt Lake City-based Overstock filed its latest complaint against Goldman Sachs and Goldman Sachs Execution & Clearing LP in Hudson County Superior Court in New Jersey on June 9.

Last year, a California court dismissed a similar lawsuit Overstock.com filed against Goldman Sachs in 2007.

In that suit, Overstock.com accused Goldman and Merrill Lynch of intentionally depressing the price of its stock by effecting "naked short sales," an exotic trading scheme that Overstock claims drove down their stock price.

Naked short selling is described in the new complaint as "selling short shares [of stock] that the seller does not have and does not borrow to make delivery. By removing the borrowing and delivery of shares, naked short selling allows for concentrated downward price pressure through unlimited short selling without the costs of borrowing."

The California complaint focused largely on the activities of two traders, Steven Hazan and Scott Arenstein, who ran afoul of financial regulators and were forced to disgorge millions in ill-gotten gains by the Securities and Exchange Commission, and barred from trading for five years.

The case was ultimately dismissed "for lack of a California connection."

In turning to the New Jersey court, Overstock.com said because the California Supreme Court declined to review the case, New Jersey RICO claims that were part of its legal action had "never been adjudicated on the merits."

Overstock.com claimed that as a result of Goldman's naked short sales, "Overstock's stock price plummeted from over $70 a share in early 2005 to under $20 a share in late 2006, and it has never bounced back to its earlier stock price."

Overstock also claimed that Goldman had profited from naked short selling and driving certain company's stock prices down in multiple ways, including payments they received for loan fees that they charge for short sales, interest they earned on margin accounts in which short selling occurs, transaction fees they charged customers and profits from selling short the same stocks that their clients are shorting.

The case also noted that "selling but failing to deliver actual shares issued by Overstock has the effect of generating a virtually unlimited supply of Overstock shares for sale."

Despite taking the trouble to revive the claims dismissed in California, Overstock.com on Thursday announced it had settled its lawsuit against Goldman, with the company telling Courthouse News it has "narrowed the focus in its long-running stock fraud case to the conduct of Merrill Lynch Professional Clearing Corporation. The California suit, initially brought against Merrill Lynch Professional Clearing Corporation and other prime brokerage firms, continues toward trial against Merrill alone."

Overstock.com CEO Patrick M. Byrne said in written statement that "despite the appeals court in its decision having found 'substantial evidence that Goldman Brokerage was itself' engaged in the fraud, Goldman has covered its retreat from battle with us well enough to escape alive this time, though it will suffer the upcoming court-ordered unsealing of records in a California courtroom."

The terms of the settlement were not disclosed.

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