Shares rise 1.8% on news Overstock can pursue suit

Shares of Salt Lake-based Overstock.com Inc., the online seller of excess inventory, rose 1.8 percent after the company said that a California court ruled that it may pursue a lawsuit against brokerages for allegedly causing its shares to drop by manipulating the stock market.

Judge John Munter of the Superior Court of California, County of San Francisco, ruled Tuesday that Overstock, which is seeking $3.48 billion in damages, may continue to pursue its claim against Morgan Stanley, Goldman Sachs Group Inc., Merrill Lynch & Co. and other brokers, the company said in a statement.

"This is a huge win for us," Jonathan Johnson, Overstock senior vice president of legal, said Wednesday in the statement. "We are eager to start discovery and move this case to trial."

Overstock in February sued more than 10 brokerage firms for their alleged attempts to profit from falling prices by selling shares without borrowing stock beforehand. The practice is called naked short selling.

"This was merely a procedural ruling that says nothing about the merits of the case," Merrill Lynch spokesman Mark Herr said in a statement.

Morgan Stanley spokeswoman Mary Claire Delaney and Goldman Sachs spokesman Ed Canaday declined comment.

Shares of Overstock, which sells electronics, kitchen goods and other discounted brand-name products over the Internet, climbed 35 cents to close at $19.97 Wednesday on the Nasdaq Stock Market.

Overstock claims the defendants took short-sale orders with no intention of covering them with borrowed stock as required, according to a Feb. 2 statement.

A short sale involves a security that an investor has borrowed in anticipation of making a profit by paying for it after its price has fallen.

Shares of Overstock have climbed 29 percent in 2007 after declines of more than 40 percent each of the two previous years. Wednesday's price was less than one-third of its record close of $76.05, reached in December 2004.

Craig Blackstone, Munter's clerk, confirmed news of Tuesday's ruling. The judge, who didn't issue a written opinion, told the parties to present him with an order to sign, Blackstone said.

Munter ruled that Overstock's complaint, which claims market manipulation under California's securities laws, violation of the state Unfair Business Practices Act, conversion, and trespass, is sufficient for the case to go forward, the company said.

The judge rejected the defendants' argument that the suit is blocked by federal law, Overstock said in the statement.

Munter will permit Overstock to amend the complaint to add more specific claims for restitution under the Unfair Business Practices Act and the theory of interference with advantage, Overstock said.

Other defendants include Bank of New York Co., Citigroup Inc. and Deutsche Bank Securities Inc. Spokesmen for the firms didn't immediately respond to requests for comment or declined to comment.

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Contributing: Kayla Tausche