Overstock.com Prevails Against Shareholder in Digital Dividend Securities Class Action

According to an opinion issued Monday, Overstock.com Inc. has beat allegations that it misled investors about a digital dividend it issued and financial forecasts it broadcasted publicly in 2019. The District of Utah court overseeing the suit dismissed the case with prejudice, despite added allegations from confidential witnesses, finding that the amended filing failed to meet the heightened pleading standard applicable to securities fraud claims.

The opinion explained that lead plaintiff The Mangrove Partners Master Fund Ltd. filed the class action against the e-commerce home furnishings retailer in September 2019, and named former officers, including CEO Patrick Byrne as defendants in the proceeding. In September 2020, the court dismissed the first complaint but permitted the investor to file an amended pleading.

This week’s opinion considered whether the revised complaint stated plausible claims under the heightened standard. Specifically, Judge Dale A. Kimball examined whether the defendants made a false or misleading statement about company information, including Overstock’s historical insurance costs, the digital dividend, its “retail guidance,” and search engine optimization (SEO) results.  

The court focused on refreshed allegations concerning retail guidance, and whether any new information provided by a confidential witness removed the retail guidance claim from the safe harbor provision of the Private Securities Litigation Reform Act of 1995 (PSLRA). It did not, the court ruled, because nothing attributed to the witness suggested that any officer “gave guidance that he knew was impossible for Overstock to meet.”

As to SEO, Judge Kimball ruled in part that two confidential witnesses’ claims contradicted one another, and therefore fell short of alleging fraud. The amended complaint “contains no well-pled facts that are inconsistent with Byrne’s statements regarding SEO,” the court wrote.

The court dismissed the plaintiff’s second count, after finding that the investor failed to add allegations indicating that the dividend or related disclosures were deceptive. “Plaintiff simply adds an array of conclusory adverbs to the prior allegations relating to the dividend, claiming it was designed ‘exclusively’ or ‘entirely’ to harm short sellers by causing a short squeeze,” the opinion said.

In addition to dismissing the claims against the individual defendants, the ruling also found the first two counts insufficient because the plaintiff failed to plead that it relied on any challenged statement or actions in purchasing Overstock shares. Judge Kimball concluded by denying leave to amend, finding that given the heightened pleading standard, and the previous opportunity, amendment would be futile.

The plaintiff is represented by Clyde, Snow & Sessions P.C. and Cohen Milstein Sellers & Toll PLLC, and Overstock by Parsons Behle & Latimer and Cooley LLP.