3 ex-workers of Gradient quizzed on Overstock

The U.S. Securities and Exchange Commission has questioned three former employees of Gradient Analytics Inc. about claims their company conspired with hedge fund Rocker Partners LLP to issue research aimed at pushing down shares of Overstock.com.

The three men said in interviews that the agency queried them this month about statements they made under oath that Gradient, a research firm based in Scottsdale, Ariz., fired them after they asked about the arrangement with Rocker Partners. The statements, posted on the Web site of Salt Lake-based Overstock.com, were used to amend a suit the company filed Aug. 11 against Gradient, Rocker Partners and its owner, David Rocker.

"The SEC may be investigating this as a variation of the standard 'bear raid,' where parties work to drive down a stock," said Donald Langevoort, a Georgetown University law professor and former SEC lawyer who isn't involved in the case. "Even if what an analyst publishes is true, it may be fraud if he fails to disclose a third party's involvement."

The SEC's queries may help Overstock.com persuade investors that its poor stock performance is due to unfair research rather than bad management, as Gradient and Rocker Partners claim. Overstock.com, which sells excess retail inventory over the Internet, said in the suit that Rocker Partners benefited from negative research through short selling of shares.

Overstock.com shares declined $1.45 to $32.92 in Nasdaq Stock Market composite trading, after trading earlier Thursday at $32.57, a 52-week low.

Short sales involve stock that a seller borrows in anticipation of making a profit by paying for it after the price drops.

"We have no direct knowledge of any SEC investigation," said Doug Curtis, a lawyer for Gradient. "Should the SEC choose to contact the company, Gradient looks forward to getting to the bottom of the false allegations that have been circulated by Overstock.com

Rocker Partners, which pays $40,000 a year for Gradient reports, has sold Overstock.com shares short. David Rocker, the hedge fund's managing partner, said in an Oct. 14 statement that Gradient wrote its first negative report about Overstock.com a year before Rocker became a Gradient client and said the credibility of the three former Gradient employees is "seriously compromised."

Gavin Rooney, a lawyer for Rocker Partners, which is based in Millburn, N.J., said, "There's no reason to believe that the SEC is investigating Rocker Partners. Nobody from the SEC has contacted us formally or informally."

SEC spokesman John Nester declined to comment.