On Monday, a press release announced that the long legal battle between Overstock.com (NASDAQ:OSTK), its nutty CEO Patrick Byrne, and Gradient Analytics was over.
It was somewhat disappointing, when it seemed that the heart of the lawsuit was an attempt to silence critics. Scare research firms so much that they’ll be reluctant to publish negative opinions about public companies. Public companies win.
Roddy Boyd of Fortune summarized the case:
Overstock (OSTK) sued Scottsdale-based Gradient and then-Millburn, N.J.-based hedge fund Rocker Partners (now known as Copper River) in August 2005 for allegedly colluding to defame Overstock and drive down its share price.
Specifically, the suit claimed that Gradient’s series of research reports on Overstock – which, beginning in 2003, were uniformly critical of its accounting and governance – were timed to benefit a group of its short-selling clients, including Rocker.
It also alleged that Gradient made drafts of its research available to Rocker prior to their general release and that Gradient worked closely with the financial media to disseminate its slanted work.
The lawsuit was a spectacle because Patrick Byrne held a special conference call following its filing, in which he had a delusional rant about conspiracy theories and a Sith Lord who was trying to ruin Overstock.
Boyd says about the settlement:
For Gradient, a settlement made economic sense. It is a small company and its insurance coverage was running out, according to a person familiar with its operations. Much of its free cash flow had to go to defending itself in this case as well as another suit filed against it in February 2006 by Canadian pharmaceutical company Biovail. Moreover, if it lost, it would be unlikely to be able to meet any judgment against it and would have had to file for bankruptcy, according to the source.
Presumably, Copper River, its general partner Marc Cohodes and its founder, the retired David Rocker, have deeper pockets.
It bears noting that Gradient did not retract its critique of Overstock as a risky proposition for investors. In deposition testimony, Gradient co-founder Donn Vickrey said there never had been a conspiracy between his firm and the hedge fund and that Gradient had been writing critically about Overstock a year before the Rocker fund subscribed to its research.
Gradient in particular cited concerns about Overstock’s customer acquisition costs and turnover. Overstock has posted just under $200 million in accumulated losses since Gradient initiated coverage in June 2003, having reported small profits in just two quarters since early 2001.
Still, it would have been nice to see the truth revealed in a courtroom. But then I took a look at it from the perspective presented by Joe Nocera, financial journalist for the New York Times. He points out that the statement made by Gradient, while somewhat apologetic sounding, doesn’t really admit anything at all.
Nocera runs through the points:
1. “Gradient now believes that, to the best if its knowledge, Overstock’s stated accounting policies did in fact conform with Generally Accepted Accounting Principles (GAAP), and regrets any prior statement to the contrary.”
Well, of course Overstock’s stated principles conform to GAAP — every company’s stated principles conform to GAAP. The real question — unmentioned in this release — is whether Overstock abused GAAP in its financial disclosure documents, which was part of the focus of the Gradient reports. In other words, in its statement Gradient doesn’t not appear to be “regretting” anything it actually wrote about Overstock.
2. “Some of Gradient’s prior reports asserted that certain Overstock directors — i.e., Allison Abraham, John Fisher and Gordon Macklin — were not independent directors according to Gradient’s criteria for evaluating independence. However, under NASD rules, those directors were independent.”
Huh? What does this have to do with anything? In particular, what does it have to do with allegations that Gradient was in cahoots with Mr. Rocker? The answer, of course, is that it has nothing to do with the case. I suspect that Gradient threw Mr. Byrne that particular bone because it was so utterly meaningless.
3. Gradient has examined and improved its internal policies concerning how it communicates with clients, including hedge funds and the media.
Again, a whole lotta nothing. There is no acknowledgment here that Gradient did anything wrong in the first place, no admission that it allowed hedge funds sneak peeks at its research, or that it did Mr. Rocker’s bidding.
4. Gradient acknowledges that former Executive Vice President of Research Matthew Kilber, a named defendant in this litigation, was not responsible for any of Gradient’s research on Overstock.
This is my personal favorite “admission.” Think about what it says: one of the people who had been sued by Overstock had nothing to do with the case. In other words, it’s an apology from Overstock, snuck into a Gradient press release. Mr. Byrne is nothing if not clever.
So in reality, Gradient admits nothing. Since the settlement is confidential, we don’t know if any money changed hands.