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Overstock.com sues Wall Street for $3.48bn

'Massive illegal stock market manipulation'

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One gets the feeling that Patrick Byrne, the boss of the online excess inventory dealer Overstock.com, would have an argument with himself if he were the only person in the room.

But let's say this for the pugnacious retailer, he's willing to take on all shapes and all sizes. On Friday, Overstock went after most of Wall Street, with a $3.48bn lawsuit filed against 12 brokerage firms, alleging a "massive, illegal stock market manipulation scheme".

Overstock claims the banks caused its share price to go into freefall, through naked short selling. Short selling is when traders sell shares to drive prices down with the intention of buying back later at a lower price. The naked version is when the stock is sold by a trader without determining first if the stock actually exists and without borrowing stock to honor the deal. Wall Street calls this "fails to deliver', because the seller cannot deliver. Got that? No? Here is a more detailed explanation (albeit from opponents from the practice).

Suffice to say, naked short selling is often - although not always - illegal under SEC rules. And Overstock.com complains that its name has appeared consistently on the lists of "fails to deliver' stock within the national clearance and settlement system, whch have been published daily since January 2005. These "manipulative activities have caused tremendous damage to Overstock," said Byrne. "I believe that this conduct is harming our company and our shareholders deeply, and that investors have been failed by those who have a duty to protect them."

The investment banks may be harming Overstock.com's share price, but recent business is not helping, either.

The company had a horrible December quarter, today reporting a net loss in Q4 of $40.7m, against last year's loss of $6.3m. At -$1.92 a share, the losses were more than double consensus analyst estimates of -84c a share. Q4 sales were down six per cent on last year to $297.5m. Sales for the full year eased one per cent to to $796.4m and full year losses were $97m (2005: $25.1m).

In a letter to shareholders today, Byrne said the company had "paid the price for hastily implemented system upgrades of 2005 and the subsequent troubles caused by them". Also the company had a very painful big inventory clear-out during the quarter. But on the upside, the system upgrades "hummed through this Q4, like well oiled machines". So that's one less headache.

The company has also trimmed staff and building costs to reflect the reality that the days of "hypergrowth" are behind it and it is not going to be a $2bn t/o company in a hurry. Also it says it has reduced inventory and is selling higher-priced, higher-margin goods these days.

And just for fun, the company has another little lawsuit to contend with - a patent spat over sweepstakes software on its site. ®

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