Professor Christine Hurt

Posted: Wed Jul 18, 2007 8:58 am Post subject: Professor Christine Hurt

Ruh-roh.They are losing control of the narrative.

An Illinois law professor named “Christine Hurt” apparently decided to take an independent look into the Mitzvah and discovered… that things are not quite as they are being portrayed in the financial media. She has to make the obligatory swipes about my “tilting at windmills” (that’s OK, I’m used to it, and besides, where I come from we believe in Quixotic quests). And she succumbs to the normal tendency to assume that this is all about Overstock, (after all, what CEO ever does anything out of patriotism or an internal moral code?) That’s OK though.

Expect one of two things to happen:

Professor Hurt will continue following and writing about these developments with independent eye, in which case she will be widely denounced as a lunatic fringe academic, crazy crazy crazy, etc.

Or some hedge fund (linked to a notorious, now banned-from-the-markets-for-life short-biased financier) will show up and make a huge donation to her college of law (as happened with one other group that began digging into this story from outside the confines of the Party Line). And she will be asked to go silent.

I have suddenly come to appreciate the value of tenure in our society.

Your humble servant,

Patrick v. Gradient (and the Rest of the World)
Posted by Christine Hurt
While the blogosphere (even here) has been debating the propriety (and legality) of the CEO of a publicly-held corporation to anonymously tout his company and denigrate a potential acquisition target, I’ve been following a story that sounds different, but has some commonalities. (and several shareholders) sued Gradient Analytics, Inc. and Rocker Partners for shorting Overstock shares, publishing false negative analyst reports, then profiting as the share price drops. The actual causes of action are libel, intentional interference with prospective economic advantage and various other California statutes. Many in the financial community pooh-poohed this as another example of CEO Patrick Byrne’s tilting at windmills, but so far a California court says there is something to it. Yes, Byrne seems to be paranoid about Wall Street, but that doesn’t mean someone isn’t out to get him!

In the lawsuit, Overstock alleges (and has affidavits from Gradient employees supporting the allegations) that Rocker Partners approached Gradient Analytics about creating reports about Apparently, much of Gradient’s business model centered around customers subscribing for tens of thousands of dollars a year and getting the opportunity to request negative reports on companies of their choice. Gradient even touted to potential customers how much a negative report on Gradient could cause the share price of a company to drop. At the request of Rocker Partners, Gradient published no fewer than 24 reports in a six-month period, and Gradient was able to approve and request changes to those reports before their release. Neither Rocker Partners nor Gradient deny the reports or the fact that Rocker was short selling Overstock shares. Their defense is that the reports are free speech. Under California law, they moved to dismiss the suit under California’s anti-SLAPP law. This motion was denied by the trial court and upheld by the appellate court (2007 WL 1545611, May 30, 2007). (I will discuss the “free speech” aspects of the case in a different post.) In the opinion, the court stated that the plaintiffs in all probability would prevail on the merits, given what was in the pleadings, and stated “The malice is in the very business model and practices that preordain negative reports and provides probative evidence that Gradient acted in reckless disregard of the truth in making the false statements and implications that it did.” All of the legal documents are collected at’s investor relations hub here.

And yes, Byrne has been railing against short sellers for years as the share price of has declined, and most of written off those (somewhat bizarre) rants. Indeed, Byrne has also filed a lawsuit against major Wall Street investment banks for being part of a vast short-selling conspiracy against his company. The short-selling conspiracy story does make one shake one’s head, though; has been on the naked short-selling watch list for over 500 days. For some reason, this company is not only sold short more than any other company, it is sold short for pure speculation, with the bettors skirting the law not to actually borrow the shares they are shorting. In any given day, more shares of are shorted than are in the public float. Whether that mystery will ever be resolved to uncover illegal machinations remains to be seen; however, this very discrete and particular case against Gradient and Rocker Partners seems to have some teeth.

Securities Regulation

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Comments (4)

1. Posted by anonymous on July 17, 2007 @ 11:12 | Permalink

Ms. Hunt,

Judging by your blog post, it looks like you read only one court document. That’s problematic for the following reason. The law requires that the court assume that the overstock claims are true *at this point* so that they can assess whether or not the Anti-SLAPP law applies. The court has not yet examined the veracity of those claims. In fact, the overstock claims are based entirely on the declaration of one disgruntled, fired ex-Gradient employee. That same ex-employee has been completely discredited by several journalists. He will be discredited at trial too, if the case ever goes to trial. You should read some of the other court documents to get a more balanced view of the issue.

2. Posted by Patrick Byrne on July 17, 2007 @ 19:45 | Permalink

Professor Hurt,

Congratulations on a cohesive summary of the situation. I respectfully warn you, though, if you keep at it you will see articles appearing about “paranoid rants” being written by a UICL law professor.

One aspect of this affair that has been eye-opening for me has been the realization of how “captured” are various social institutions.

First and foremost of these is, of course, the SEC. For example, the practices described in our lawsuit have long been widely known on Wall Street, and our allegations seem to be widely regarded to be true by the “smart money”. Years and years ago, long before Overstock existed, this type of behavior was explained to me in a “this is how the game is played” kind of way. Several of the most prominent figures on Wall Street today have encouraged me in this fight, saying things like, “I’ve watched these jerks do this for years, it is about time someone stood up to them.” It is not a tough problem to solve. It is, however, a tough problem to solve without seeing about two dozen rich guys get their heads handed to them in court. The SEC lacks the will to do that. They can take on Martha Stewart over a few tens of thousands of dollars, but they cannot stand up to the toughest hedge funds on Wall Street.

Regulatory capture is nothing to be surprised about, I know, but the capture of the industry of financial journalism is especially disheartening. I have dealt with dozens of journalists over the years, and have generally found them to be honest, intelligent, and fair. In fact, for years I told people that the common perception of journalists was way off the mark in that way. However, when it comes to reporters on the Wall Street beat, what I have found has amazed me, in that they will not even consider data that is coming out of academia, based on Freedom of Information Act requests of our government, that indicate the problems in our settlement system are deep. The hedge fund friends who feed them their stories tell them to ignore it, so they dutifully ignore it, even though there are now some serious, heavyweight economists who are saying, “Houston, we have a problem.”

I should make clear that I do not think my claim about financial journalists is a universal truth. There are several good ones, notably Gretchen Morgenson at NYT, who has written compellingly of an SEC whistleblower named Aguirre who has given compelling testimony about the SEC’s capture by Wall Street figures with “juice”, as his superior once described someone Aguirre was investigating. Gary Matsumoto and Bob Drummond at Bloomberg have done explosive articles on the naked shorting controversy, as has Liz Moyers at Forbes, while her colleague there, Nathan Vardi, has written of the involvement of Russian OC in these matters. But by and large, the financial press has shown itself the lapdog of the financial industry. The Wall Street Journal is to Wall Street as Sports Illustrated is to sports, Fortune is People Magazine for capitalists, and The New York Post financial columns are for folks who move their lips when they read People.

This explains the anonymous post that precedes mine. What has actually happened is that certain miscreants committed acts A, and we filed a lawsuit alleging that A occurred. Their Motion to Demur had to state not-A, but because they did not even want A out there in the public mind, their pet reporters have written about the case as being about something else entirely, X, to the point that they would not even describe the contents of the affidavits at issue. That the 5 or 6 reporters who have so studiously insisted that is is about X are the same small crew of 5 or 6 who have spent their careers writing hatchet jobs on the same companies that those miscreants have shorted, is, I am sure, entirely coincidental. It just one of those coincidences that happens over and over with complete predictability.

The problem for them all is that the wig is beginning to slip. The trial judge in Marin decided on all counts, 8-0, that this suit is not about X, it is about A. The California AG weighed in with an amicus agreeing that this case is not about X, it is about A. The California Court of Appeals decided 3-0 that it is not about X, it is about A, and denied their motion to reconsider the question. So the problem for them has become, how do they keep the wig in place? A slew of hedge fund choagies from the NYT, NYP, Fortune, and WSJ (Nocera, Roddy Boyd, and the Minions of Kansas) wrote stories about how crazy and paranoid were my rants, but unfortunately for them, a small subset of the evidence from which I drew my beliefs has been examined by a trial judge, an AG, and three jurists of an appellate court, who have all said, “Yep, they’re probably going to win.”

The anonymous post on your site is a fine example of what I mean. Returning from it to the real world for a moment, what we have is a series of people who worked for a company who realized it was crooked. Three of them came forward and said to their boss, “We cannot do this anymore. This business model is completely illegal. This has to stop.” A few days later they were fired. They brought their information to me, I investigated and found more employees with the same story, and I started a lawsuit. Of course, Roddy Boyd and the other cronies dutifully play their role by saying that they are all just disgruntled ex-employees: that is the stuff about, “That same ex-employee has been completely discredited by several journalists” (the insistence that “the overstock claims are based entirely on the declaration of one disgruntled, fired ex-Gradient employee” is just another of those false claims they numbly repeat with mantra-fervor in the hope that will make it true, but a quick check of the documents you linked to on our site will dispel their claim).

Believe it or not, someday soon the Law & Economics, Public Choice, and CLS folks are all going to find a huge area of agreement: behind the scenes, powerful interests have jacked the controls of our society to a degree that only the most paranoid imagined. This case against Gradient, Rocker et. al, and our other against the prime brokers, are going to provide windows into that world.

So when in your writings you notice simple, obvious things like the CA Court of Appeals rejects their arguments 3-0, please expect to find yourself denounced as a paranoid as well, with great energy, by the same handful of reporters (Herb, Roddy, Bethany, etc.) who write story after story on every other company (e.g., CROX shoes, Taser, Take-Two, etc.) that David Rocker and his friends short.

Always, I am sure, coincidentally.

Patrick Byrne

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