Judge Junks Overstock Lawsuit Against Goldman, Merrill

Jan 12 2012 | 12:32pm ET

A California judge has dismissed a lawsuit against two banks over allegations that they conspired to drive down the share price of Overstock.com Inc. in cahoots with hedge funds.

Overstock said that Goldman Sachs and Merrill Lynch, which is now part of Bank of America, never delivered shares to hedge funds and other clients shorting Overstock shares. In fact, the online retailer says that the banks actually lent more shares than were outstanding to hedge funds hungry to bet against the company—but reaped the securities lending fees anyway.

But Judge John Munter in San Francisco junked the suit because Overstock failed to show that any of the allegedly improper conduct took place in California.

"Plaintiffs have failed to raise a triable issue of material fact supportive of a finding that any act by any defendant foundational to liability, causation or damages occurred in California," Munter ruled.

Lawyers for Goldman and Merrill had also argued that the alleged actions hadn't actually hurt Overstock shares.

"There's no evidence in the record that the defendants' fails-to-deliver, regardless of what short sales we might have caused as a result of that, caused Overstock to be in the top 1% of all shorted companies," Merrill lawyer Andrew Frackman said at a hearing last week. "Their prime broker, their settling departments that were engaged in this are located in New York and New Jersey."

Overstock said it would appeal the dismissal—and bring new lawsuits.

"Because the defendants have admitted their conduct took place outside of California, we intend to file suit in another state," Jonathan Johnson, Overstock president, said.

The legal spat with Goldman and Merrill isn't the first time Overstock has headed to court over the short-selling allegations. In 2005, it sued Copper River Partners—formerly Rocker Partners—and a research firm, accusing them of conspiring to drive down its share price.

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