McGlinchey team successfully defends ex-Overstock CEO in securities class action
McGlinchey attorneys Bob Driscoll and Alfred Carry (Washington, DC) obtained a dismissal in favor of client Patrick Byrne, founder and former CEO of Overstock in a putative class action alleging securities fraud, market manipulation, and other secondary claims.
Investors, led by known short-seller Mangrove Partners Master Fund, accused Overstock and its executives of misrepresenting financial projections and scheming to “squeeze” short-sellers by issuing a “locked up” digital dividend that would artificially inflate Overstock’s share price to punish short-sellers and permit Byrne to make millions of dollars selling his founding stake in Overstock when he left the company.
On September 28, 2020, District Judge Dale A. Kimball of the Utah federal district court rejected these claims. “Plaintiff’s heavy reliance on the fact that Overstock ultimately missed its guidance is a classic attempt to plead fraud by hindsight. . . . Byrne’s statement that the guidance provided was a ‘best guess estimate’ merely recognizes reality,” Judge Kimball’s opinion held. The court further noted that statements regarding the future financial prospects of a company are protected by the Private Securities Litigation Reform Act’s safe-harbor provisions, which recognize that not every good-faith prediction of future performance supports a federal securities class action merely because it happens to be inaccurate in retrospect.
Adding to the body of federal securities law decisions, the court further held that a company’s disclosures need not state the obvious. As the McGlinchey team argued, because the terms of the novel dividend (including a limit on transferability under SEC rules) were clearly disclosed, the market immediately recognized the impact the blockchain dividend would have on short-sellers, and thus the possibility of a “short squeeze” did not need to be explicitly disclosed. Judge Kimball agreed, noting Byrne’s alleged “very public disdain for short sellers,” which was featured prominently in plaintiff’s complaint, “is beside the point,” for “any CEO of a public company that is heavily shorted would want to reduce the downward pressure those shorts exert on his company’s stock price,” and whether a CEO might dislike short-sellers improperly frames the issue.
As the McGlinchey team argued, because the terms of the novel dividend (including a limit on transferability under SEC rules) were clearly disclosed, the market immediately recognized the impact the blockchain dividend would have on short-sellers, and thus the possibility of a “short squeeze” did not need to be explicitly disclosed. Judge Kimball agreed.
Plaintiff’s market manipulation claim was also defeated when the court adopted the reasoning of the defense team, recognizing that the gravamen of a market manipulation claim is deception of investors. “A manipulative act requires deception,” and the court did not find such deception by Byrne or Overstock because “Overstock announced its intent to issue the dividend and disclosed all the related risks including the SEC regulatory risk and execution risk that the issuance might not happen as scheduled or intended.” Furthermore, the court found that the “locked up” nature of the blockchain dividend, which impaired the ability of short-sellers to acquire the dividend to repay the lender of the shorted shares—arguably forcing them to “cover” their short position as the dividend date approached—did not change the analysis. Issuing shares that could not be transferred for a period of time pursuant to SEC Rule 144 was not a manipulative act because, as Judge Kimball observed, “[c]omplying with SEC rules does not demonstrate deception or manipulation,” and “there is no evidence that targeting short sellers was the purpose of the dividend. . . . Overstock was trying to transition from being a traditional online retailer to a blockchain technology business. The dividend was a creative way to strengthen that transition. Plaintiff has no evidence to overcome this legitimate business [purpose] for issuing the dividend.”
In sum, albeit in a novel fact pattern, the court upheld the maxim that the federal securities laws are not insurance for an investor’s (even a short-seller’s) bad investment strategy, and the McGlinchey team is pleased that the court ultimately agreed.
For more information about the case and court’s opinion, see The Mangrove Partners Master Fund v. Overstock.com, et al., Case No. 2:19-cv-00709 (D. Utah).
Bob Driscoll is the co-chair of the firm’s Government Investigations Group, and he works with Associate Alfred Carry out of the Washington, DC office.
This client win was covered by Law360, quoting Bob Driscoll.