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All that the attorneys for Overstock.com Inc. want at this point is a trial on the company’s libel claims. And a trial it seems they’ll get. During 75 minutes of oral arguments Tuesday, San Francisco’s First District Court of Appeal seemed ready to let the online retailer get a full airing on its claims that a financial analysis company and a hedge fund conspired to put it out of business. “We’re at the pleading stage,” Justice Maria Rivera told the defendants’ lawyers. “It’s not time yet to decide all these various levels [of legal issues], because the evidence we have is basically skeletal.” Justice Ignazio Ruvolo indicated there was evidence even “at this stage of the proceedings” that could substantiate Overstock.com’s claims. Salt Lake City-based Overstock.com filed suit in 2005, accusing Gradient Analytics Inc. of conspiring with the analyst’s client, Rocker Partners, to drive down Overstock.com’s stock with reports based on false information. Overstock.com contends that New Jersey-based Rocker convinced Arizona-based Gradient to give Overstock.com an “F” rating by, among other things, claiming that company executives had falsified accounting statements. The suit accuses Rocker of trying to profit from the short selling of Overstock.com stock. The case has Wall Street’s rapt attention. Financial journalists and stock analysts have argued in amici curiae briefs that a victory for Overstock.com could have a serious chilling effect on organizations that provide financial opinions. Anxiety was ramped up last year when Marin County Superior Court Judge Vernon Smith refused to dismiss the case as a SLAPP, or strategic lawsuit against public participation. The defendants appealed in hope of getting Smith reversed. Steven Hirsch, a Keker & Van Nest partner who argued Gradient’s position Tuesday, tried to play on the appeal court’s sympathies by saying libel suits such as Overstock.com’s could be crippling for some companies in the highly competitive world of financial analysis. “We’re a small, independent company,” he said of Gradient. “This kind of thing can put us out of business.” Even so, the questions asked by Ruvolo, Rivera and Justice Timothy Reardon strongly indicated that Hirsch wasn’t going to win the day.
‘We’re a small independent company. This kind of thing can put us out of business.’

Gradient lawyer Steven Hirsch Keker & Van Nest

Matters got off to an immediate rough start for Hirsch when he argued that the case was only about Gradient saying “bad things” about Overstock.com. “False things might be a better way of putting it,” Ruvolo interrupted. “Allegedly false things,” Hirsch responded. “Why don’t we say ‘negative things?’” “We’d rather stick with falsity,” Ruvolo said. Hirsch tried to argue that Overstock.com had no chance of prevailing on its claims. The company, he said, has mostly “circumstantial evidence of malice” and can’t show any ill intent by Gradient or Rocker. “Gradient is free to disagree with [Overstock.com's] auditors,” Hirsch said. “If not, then the concept of independent research is out the window.” Justice Ruvolo, however, said that by downplaying Overstock.com as an investment, Gradient had essentially yelled “fire” on the floor of the New York Stock Exchange. “Isn’t that a very serious allegation being made about Overstock?” he asked. Gavin Rooney, a partner in Roseland, N.J.’s Lowenstein Sandler who argued for Rocker, didn’t fare much better, especially when he tried to say that Overstock.com made allegations about negative, but not false, reports. “There’s more than that, though, Mr. Rooney,” Ruvolo said. He pointed out that Overstock.com alleges Rocker even asked Gradient to delay its negative reports to give Rocker time to solidify its short position. Ruvolo also noted that Overstock.com’s stock dropped from $73 a share in early 2005 to the high 20s a year later. “Their point is, there’s a direct link in time,” Ruvolo said. “They basically claim they were carpet-bombed with these reports in early 2005.” Overstock.com’s lawyer, Theodore “Dore” Griffinger Jr., of counsel in San Francisco’s Stein & Lubin, used his time to argue that Gradient and Rocker had worked together to issue more than 50 negative reports on Overstock.com in less than a year. “The implicit message in these 50 reports,” he said, “was that Overstock was intentionally falsifying its accounting records � to mislead the public.” “This is not free speech,” Griffinger argued. “This is a scheme to drive down the price of stocks.” The few questions directed at Griffinger were favorable to his position. Hirsch tried to use his rebuttal time to bolster Gradient’s image. He said Gradient had come to the conclusion that Overstock.com had a “fatally flawed business plan” before Rocker became a client. He also said Gradient had a good record of predicting bad investments. “We blew the whistle on Krispy Kreme, and [its stock] went right down hill,” Hirsch said. “We blew the whistle on Tyco, and it went right down hill.” Giving Overstock.com an “F” rating, he argued, “is not evidence of malice.” A ruling in Gradient Analytics Inc. v. Overstock.com Inc., A113397, is due within 90 days.

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