McGlinchey team successfully defends ex-Overstock CEO in securities class action
McGlinchey attorneys Bob Driscoll and Alfred Carry (Washington, DC) obtained another 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.
This is the second time that the McGlinchey team prevailed on a motion to dismiss in a securities fraud class action brought by Lead Plaintiff and known short-seller Mangrove Partners Master Fund. In these cases, Plaintiff has alleged that Defendants made false statements about Overstock’s financial projections for 2019 and schemed 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. In both cases, McGlinchey and the defense team prevailed on the motion to dismiss with court holding that Plaintiffs have failed to show false or misleading statements and scienter under the heightened standards of the Private Securities Litigation Reform Act (PLSRA).
District Judge Dale A. Kimball of the Utah federal district court first rejected these claims in a September 2020 opinion:
“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 PLSRA ‘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.
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.”
This client win was covered by Law360, quoting Bob Driscoll.
In early 2021, the court allowed Plaintiffs to file an amended consolidated complaint based on new evidence. This new evidence included statements from new confidential witnesses who were described as senior-level executives and front-end developers previously employed at Overstock and involved in the 2019 planning process with the individual defendants. The amended complaint included additional allegations about Byrne’s alleged vendetta against short sellers. It also renewed allegations that the locked up feature of the digital dividend had no business purposes and was implemented solely to create a short squeeze to harm short sellers and allow Byrne to liquidate his stock at artificially high prices.
In a September 2021 decision, the district court once again granted the McGlinchey team’s motion to dismiss all claims against Patrick Byrne. The opinion by Judge Kimball held that the amended complaint failed to plead sufficient facts showing that any defendant made a false or misleading statement about Overstock’s historical insurance costs, dividend, retail guidance or SEO results. The court again agreed with Defendant’s position that the new allegations fail to show a false or misleading statement under the heightened standards of the PLSRA. Moreover, the court also dismissed all scienter allegations against Patrick Byrne, holding that the allegations in the amended complaint were simply “slightly repacked but essentially the same allegations the court previously rejected as inadequate.”
“The court agrees with Defendants that it defies common sense that Defendants would attempt to issue an ‘illegal’ dividend or attempt to mislead investors by fully disclosing their plan not to register the dividend.”
Plaintiffs have appealed the dismissal to the 10th circuit. Oral argument before the 10th Circuit is scheduled for September 2022.