Court refuses to toss suit filed by Overstock.com

A California appeals court refused to throw out a suit accusing Gradient Analytics Inc., a research firm, and Rocker Partners LLC, a hedge fund, of driving down the price of Overstock.com Inc. shares.

Overstock.com, a Salt Lake-based Internet seller of discounted brand-name goods, charged Gradient issued false and misleading reports about Overstock, using information from Rocker to help the hedge fund profit on trades. Arizona-based Gradient, which does work for hedge and mutual funds, argued that its research reports criticizing Overstock were protected free speech.

A California state appeals court in San Francisco Wednesday rejected Gradient's claims, upholding a lower court ruling denying a motion to dismiss the case. The appeals court said whether Gradient's reports contain provably false statements made with malice are issues that should be decided at trial.

"Clients, such as Rocker, who want a preconceived result from the reports, provide information to Gradient, ask for changes, suggest amplifying negative aspects," the court said. "This model supports an inference of malice."

Gradient said it plans to appeal the ruling to the California Supreme Court

"The appellate court's ruling is strictly procedural," Gradient President and CEO Brad Forst said in a statement. "It simply holds that this is too early a stage in the case to dismiss the action, but it is not a ruling on the merits of the case nor a confirmation of the allegations made in the lawsuit."

The ruling allows the case to proceed with evidence gathering in Marin County Superior Court in San Rafael, Calif.

Gavin Rooney, an attorney for Rocker Partners, didn't immediately return a message seeking comment on the ruling.

Overstock's lawsuit accuses Gradient of issuing false stock reports and letting Rocker, a Gradient client, influence the contents of the reports to help the hedge fund benefit from short selling trades that were a bet Overstock's shares would fall in price. Gradient and Rocker deny wrongdoing and say the lawsuit is an attempt by Overstock to silence its critics.

Overstock, which sued in August 2005, says that, starting in June 2003, Gradient released false and misleading reports with information supplied by Rocker Partners that helped drive stock down from a high of $77.18 in January 2005, damaged its reputation and made it difficult to raise investment capital.

A judge in San Rafael, Calif., refused to throw out the suit in March 2006.