New Evidence Forces Judge to Reverse Dismissal Order in Overstock Case

Overstock appears to be gearing for another legal bout with its investors as a recent favorable ruling has been walked back. Earlier this week, Judge Dale Kimball of a federal court in Utah reversed a previous ruling to dismiss a class-action lawsuit against the online retailer over its digital dividend issuance.

Overstock Still on the Hook

According to his ruling, Judge Kimball will now grant the plaintiff’s amended consolidated complaint to move forward. The entire suit originates from Overstock’s digital dividend initiative, which the company offered back in July 2019. 

Called the “Digital Voting Series A-1 Preferred Stock,” the dividend traded on Overstock’s blockchain platform. However, it carried a clause – investors wouldn’t be able to trade it for six months. 

Led by Mangrove Partners Fund, investors eventually sued Overstock and two of its executives – CEO Patrick Byrne and CFO Greg Iverson. 

Charges in the lawsuit were primarily securities fraud, with plaintiffs accusing the defendants of tampering with Overstock’s price to punish short-sellers. 

“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.

The suit also added that Iverson and Byrne had violated Section 10(b) of the Securities Exchange Act, which related to antifraud provisions of securities swaps. 

Since Byrne was the dividend’s controlling person, he was additionally accused of violating Section 20(a) of the same act. 

The suit addressed Byrne’s exit from Overstock as well. In it, plaintiffs alleged that Overstock had issued misleading year-end projections on its tZERO securities exchange. 

This way, it could drive up the stock price and allow Byrne to leave with a hefty golden parachute. The former CEO eventually exited the company in September 2019, selling his entire 13 percent stake for $90 million. 

However, this only followed news of the digital dividend, which had caused Overstock’s stock price to jump 97 percent. 

New Evidence Throws a Wrench in Overstock’s Plans

Kimball had initially dismissed the suit. In his September 2020 ruling, the judge claimed that the plaintiff’s allegations were false, and that Overstock’s the Private Securities Litigation Reform Act protected Overstock’s revised earnings statements. However, he appears to have had a change of heart.

In his ruling this week, the judge explained that his previous order to dismiss the suit was a “mistake” caused by overlooking a footnote in the plaintiff’s opposition to Overstock’s motion to dismiss. The footnote apparently included additional evidence from confidential witnesses who argued that Overstock’s executives were part of the fraud in the first place.

It is unclear where things go from here. Hopefully, the case will get a fairer resolution in light of the new evidence.