BinomialMarketingExperiment.com

Overstock.com Sues All The Major US Brokers

2 February, 2007 (18:11) | OSTK: the Stock | No comments

When companies file things on a Friday after the bell, it should cause your skeptiscms to bubble out to the surface. In that light, and given that they repeat their crucial Q4 earnings on Monday, the announcement that Overstock.com is suing all of Wall Streets major brokers for $3.5bn is ridiculous.

Overstock.com, Inc. (Nasdaq: OSTK - News) announced today that it has filed a lawsuit in the Superior Court of California, County of San Francisco against Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bank of America Securities LLC, Bank of New York, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., UBS Financial Services, Inc., and others. Certain shareholders of the company have joined Overstock.com in the suit.

Stock manipulation (if it was/is actually happening) should be irrelevant to the operations of a business. It doesn’t affect the income statement or the cash flows of a company. Also suing for 10x the market cap of your company is absurd. How could that much value have been lost? Even if it is punitive, it’s out of context with reality.

The suit alleges that the defendants, who control over 80% of the prime brokerage market, participated in a massive, illegal stock market manipulation scheme and that the defendants had no intention of covering such orders with borrowed stock, as they are required to do, causing what are referred to as “fails to deliver.” The suit also alleges that the defendants’ actions caused and continue to cause dramatic distortions with regard to the nature and amount of trading in the company’s stock which have caused the share price of the company’s stock to dramatically drop. The suit asserts that a persistent large number of “fails to deliver” creates large downward pressure on the price of a company’s stock and that the amount of “fails to deliver” has exceeded the company’s entire supply of outstanding shares.

Maybe this is true. Unlikely, but maybe. But the timing is a deliberate distraction from the actual operating results of a struggling and underwhelming internet retailer. That management would do this, is telling and a signal of weakness.