Patrick Byrne

In recent weeks, Salt Lake-based retailer Inc.'s president, Patrick Byrne, has publicly dueled with two opponents — a research firm and a hedge fund — that he says are working together to drive down his company's stock so it can be taken over by an unnamed "bottom feeder."

Now Byrne is trying to back up his allegations with declarations from three former employees of a stock-research firm called Gradient Analytics Inc. He says the declarations support his contention that Gradient negatively adjusted its research on at the request of David Rocker's Rocker Partners LP, a hedge fund that has acknowledged taking a bearish short position in Overstock's shares. Shorts sell barred stock in the hope that the stock price will drop and they can return the loan and pocket the difference as profit.

The declarations from the three former Gradient employees are the latest in an increasingly heated and often weird stock-market battle. Even before the declarations have been filed with the court, they are under attack because two came from people who were fired by Gradient last year.

And while Byrne, who holds a doctorate in philosophy, has directed criticism at Rocker, there are other Overstock bears out there: Over half the available shares are accounted for by short-sellers, making it difficult for anyone else to borrow the shares to sell them short. That lack of shares has played into complaints made by Byrne and some of his supporters that Overstock is a victim of illegal "naked shorting," in which shorts are selling stock they haven't actually borrowed and are harming public companies, particularly smaller ones.

Bulls and bears frequent Internet chat rooms to duke it out over the stock and Byrne's stewardship of the company, and their postings run the gamut from gushing to vitriolic.

Probably nobody has been more outspoken than Byrne, whose company sells discount merchandise over the Internet. Through the first six months of this year, Overstock reported a net loss of $6.7 million on revenue of more than $316 million. Its stock price, which soared from the low teens in late 2003 to over $75 a share by late 2004, now is about $40 on the Nasdaq Stock Market.

During a widely disseminated conference call last month, Byrne named a range of perceived detractors in a rambling presentation he dubbed "The Miscreant's Ball." Among the media outlets he criticized was The Wall Street Journal. Byrne alleged a plan "to destroy our stock" and pass control of Overstock to an unnamed "bottom feeder." Overseeing this effort, he added, was "the Sith Lord or mastermind" — a reference to an evil, shadowy figure in the "Star Wars" movies — whom he also declined to name but described as a famous figure and "one of the master criminals from the 1980s."

The conference call had been held in connection with Overstock filing a lawsuit in a Marin County, Calif., state court against several individuals and entities that the company alleges are part of the effort to drive down Overstock shares. The two lead defendants are Gradient, a stock-research firm based in Scottsdale, Ariz., that has published critical reports on Overstock, and Rocker Partners, based in New York. The suit contends that while Gradient claims to do "independent" research, it is really a "shill" for Rocker, which manipulated the firm's Overstock reports to be "simply platforms . . . to pursue its investment agenda."

Gradient and Rocker have denied any wrongdoing in connection with Overstock. In a news release following the suit's filing, Rocker said that it and two fund partners named in the suit, Rocker and Marc Cohodes, plan to bring counterclaims against Byrne and others for their "smear campaign."

The latest development: The former Gradient employees have supplied sworn declarations to Overstock attorneys backing up Byrne's assertions about Gradient research. Copies of those declarations, which haven't yet been filed in the court case, have been reviewed by The Wall Street Journal.

Gradient was formed in 1996 as Camelback Research Alliance. It provides research on particular stocks to clients, mostly mutual funds and hedge funds. The firm's Web site describes Gradient as "uncompromising in its approach to independent financial research."

In his declaration, former Gradient customer representa- tive Demetrios Anifantis said he was involved in phone calls in which top Rocker officials asked Gradient to include "more negative information" in Overstock reports and to "downplay any positive facts." Anifantis further contended that Gradient would modify reports to meet Rocker's requests and that Rocker on occasion asked that a report be held for a period of time so that it could make a trade in the stock.

The two other declarations — by Robert Ballash and Daryl Smith, both former sales representatives — make similar allegations about the ability of Gradient's clients to influence the firm's stock research, though they for the most part don't mention Rocker or any specific fund.

Anifantis and Ballash also say they had concerns involving the connection of senior Gradient officials to what one declaration described as a "hedge-fund adviser." A conflict could arise if that entity had been investing money in stocks Gradient was covering, Anifantis said.

Attorneys for Gradient and Rocker declined to comment on the trio's allegations, saying that they hadn't seen the declarations — or even been served yet with the August lawsuit. Under California law, a plaintiff has as many as 60 days after filing a suit to serve it on defendants.

The former employees' version of events are likely to be disputed. For one, Anifantis alleges that Rocker was making requests of Gradient as early as 2003. Yet Rocker didn't become a client of Gradient until July 2004, according to people familiar with the matter. Gradient began putting out negative reports on Overstock in mid-2003, and one early report expressed concerns that ranged from Overstock's accounting practices to the independence of its board.

Anifantis and Ballash were discharged by Gradient last November. Arizona authorities later turned down a request by Anifantis for unemployment benefits, finding that he had been discharged for misconduct in trying to obtain a commission. The New York Post reported Monday that both men had been fired for violations of Gradient's corporate policy.

In a phone interview, Anifantis denied any misconduct. As for when Rocker became a Gradient client, he said, "Just because they don't have a paying relationship doesn't mean they don't have influence."

In a recent phone interview, Ballash said he was told that the discharge was for "malicious conduct" involving alleged failure to do his job and the alleged taking of company property. "But I think we were really asking too many questions" about Gradient's relationship with clients. Ballash denies any wrongdoing.