Mangrove Partners loses securities fraud appeal against Overstock
18 October 2024 US
Image: suldev/stock.adobe.com
The Mangrove Partners Master Fund has lost an appeal in its securities class action against Overstock.com and its key executives, including former CEO Patrick Byrne.
The 10th US Circuit Court of Appeals rejected the case where the short seller accused the online retailer of misleading investors about its sales prospects through a blockchain-based digital dividend aimed at squeezing short sellers in early 2019.
The court dismissed these claims on the basis of insufficient allegations of securities fraud and market manipulation under the relevant securities laws.
A short squeeze occurs when short sellers are forced to buy shares at rising prices, artificially inflating the stock value. However, the court stated that Overstock had fully disclosed the details of the dividend in advance, so there was no deception or fraudulent manipulation.
Circuit Judge Lucero Carson said: “We conclude that the market received notice that short sellers might buy Overstock stock to cover their positions before the dividend's record date, evidenced by market analysts’ descriptions of the dividend's potential impact.
“Because buyers and sellers possessed sufficient information to form judgments about how Overstock's dividend would impact Overstock's share price, plaintiff fails to allege that Overstock deceived investors as to how other market participants have valued a security.”
The court emphasised that for a securities fraud claim, the plaintiff must prove that it relied on the defendant’s misrepresentations in deciding to buy or sell the stock, but in its pleadings, Mangrove Partners admitted that it bought Overstock shares to avoid breaching lending contracts.
“Plaintiff cannot have it both ways,” Carson adds. “If [Magrove Partners] bought [Overstock] shares to avoid breaching its lending contracts, it cannot also have bought its shares because of the defendant's alleged misstatements.”
Based on the above reasoning, the court of appeals upheld the Utah district court’s ruling in favour of the defendant.
The decision also dismissed control-person liability and insider trading accusations against Byrne.
The 10th US Circuit Court of Appeals rejected the case where the short seller accused the online retailer of misleading investors about its sales prospects through a blockchain-based digital dividend aimed at squeezing short sellers in early 2019.
The court dismissed these claims on the basis of insufficient allegations of securities fraud and market manipulation under the relevant securities laws.
A short squeeze occurs when short sellers are forced to buy shares at rising prices, artificially inflating the stock value. However, the court stated that Overstock had fully disclosed the details of the dividend in advance, so there was no deception or fraudulent manipulation.
Circuit Judge Lucero Carson said: “We conclude that the market received notice that short sellers might buy Overstock stock to cover their positions before the dividend's record date, evidenced by market analysts’ descriptions of the dividend's potential impact.
“Because buyers and sellers possessed sufficient information to form judgments about how Overstock's dividend would impact Overstock's share price, plaintiff fails to allege that Overstock deceived investors as to how other market participants have valued a security.”
The court emphasised that for a securities fraud claim, the plaintiff must prove that it relied on the defendant’s misrepresentations in deciding to buy or sell the stock, but in its pleadings, Mangrove Partners admitted that it bought Overstock shares to avoid breaching lending contracts.
“Plaintiff cannot have it both ways,” Carson adds. “If [Magrove Partners] bought [Overstock] shares to avoid breaching its lending contracts, it cannot also have bought its shares because of the defendant's alleged misstatements.”
Based on the above reasoning, the court of appeals upheld the Utah district court’s ruling in favour of the defendant.
The decision also dismissed control-person liability and insider trading accusations against Byrne.
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