A proposed class action has been filed by an Overstock.com stockholder who alleges the online home goods retailer and its CEO and CFO intentionally withheld from investors and the Securities and Exchange Commission (SEC) the “extreme risks and foreseeable volatility” likely to spring up should the parties’ “true intentions” behind Overstock’s tZERO cryptocurrency offering be discovered. The 61-page complaint looks to cover those who bought Overstock.com securities between May 9 and September 23, 2019 (the class period).
Filed in Utah District Court, the lawsuit states that Overstock was for some time hopelessly locked in a market-share battle with competitor Wayfair.com, who the case says was willing to sacrifice billions to gain control over the retail space for furniture and bed, bath and kitchen products. Overstock was mired in a streak of losing money, the complaint reads, and had failed to report a new quarterly profit since Q4 2016.
According to the case, Overstock, realizing the nature of the market itself made it all but impossible to get back into the black, made forays into blockchain to profit from new cryptocurrency markets. As the lawsuit tells it, by May 2019, the start of the class period, Overstock had “suddenly returned to profitability” on an EBITDA (earnings before interest, tax, depreciation and amortization) basis. In fact, Overstock’s resurgence was such that the company raised its year-end guidance at the start of the class period by 50 percent in the run-up to the launch of its tZERO cryptocurrency project, the lawsuit says. Shareholders spent more than $100 million to get tZERO operational, and were told to expect Overstock to earn “at least $17.5 million of EBITDA” by the end of 2019, the suit adds.
The plaintiff alleges that despite issuing a series of press releases, statements in SEC filings, and comments during analyst and investor conference calls promoting Overstock’s segue into being a cryptocurrency exchange and what investors could reap from the transition, the defendants failed to disclose the “extreme risks and volatility” that would crop up should the reasons behind the company’s development of tZERO in the first place be discovered.
The lawsuit claims that Overstock investors discovered around September 16, 2019 that the company engineered tZERO “as revenge upon short sellers,” and effectively tried to create a “short squeeze,” i.e. a rapid increase in a stock price occurring when there is a lack of supply and excess demand, by offering a crypto token dividend “that would not be registered and could not be resold” for at least six months. This six-month window, which the lawsuit calls a “lock-up period,” stemming from the issuance of the allegedly unregistered security resulted in short sellers being unable to deliver the security upon the surrender of their shares.
According to the lawsuit, because a short seller is responsible for any dividends issued during the period in which a seller has borrowed shares, the inability to obtain the locked-up tZERO crypto token “made it impossible for short sellers to maintain their short positions.” During the class period, the case goes on, Overstock’s stock was heavily shorted. The net effect of the defendants’ short squeeze, the suit says, was a bump in Overstock’s stock price in the short term. Shortly thereafter, however, investment banks made it known that they would accept cash in lieu of Overstock’s cryptocurrency dividend, which the complaint asserts came back to bite the defendants. From the lawsuit:
“During the period when defendants were executing this short squeeze, and as shares of Overstock spiked in advance of the expected crypto Dividend date, however, investment banks began to make it known that they would accept cash in lieu of the crypto dividend. This alone had the effect of ending this short squeeze, but not before shares of the Company spiked up from $16 to almost $27.00 per share. Soon thereafter, on September 18, 2019, Overstock too relented and announced that it would modify the terms of its tZERO Dividend, and register such shares so as to avoid any lock-up. This too had the effect of ending the embargo against short sellers.
The end of the short squeeze caused shares of the Company to immediately deflate. While shares traded to a Class Period high of $26.89 each on September 13, 2019, they traded to as low as $15.50 by September 18, 2019, three trading days later, after investors learned that the tZERO dividend was designed to be a short squeeze, and after the squeeze was first disrupted by investment banks and then abandoned by the Company. Investors also ultimately learned that it was the SEC that quietly put a stop to Overstock’s attempted market manipulation scheme.”
The defendants’ “real motive” for the tZERO crypto dividend, the lawsuit argues, was to punish short sellers from what the company saw as “a decade-long campaign” of shorting Overstock stock and acting as an effective market-check. The case alleges that before market participants and the SEC blew the cover off Overstock’s apparent short-selling-prevention plan, the company’s CEO “liquidated over $102 million” of his privately held shares, including nearly $92 million sold between September 16 and 18, 2019, around when the SEC informed Overstock it could no longer issue locked-up crypto dividends.
According to the lawsuit’s narrative, investors learned the whole truth on September 23, the final day of the class period. It also became public around then that Overstock would not reach its previous guidance goals, the suit says. According to the case, investors came to learn that Overstock’s CEO liquidated his shares knowing the “sky-high” Directors & Offers liability insurance rates would case the company to miss its Q3 and fiscal year 2019 guidance.
“By the time shareholders realized the scope of the misrepresentations that had been made to them during the short 5 months of the Class Period, shares of Overstock collapsed, falling from just below $15.00 per share on September 20, 2019, the trading day prior to September 23, 2019, to as low as $11.05 per share, before closing at $11.19 per share – a one day decline of almost 50%,” the lawsuit reads.
The plaintiff charges the defendants “were motivated to and did conceal” the true operational and financial health of Overstock.com, harming proposed class members.