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Short seller accused Overstock of using “digital dividend” to manipulate the market, court dismissed the lawsuit
A federal judge in Utah has dismissed a lawsuit accusing Overstock ($OSTK) of manipulating the market by distributing “digital dividends” in security tokens to shareholders and repeatedly revising retail earnings guidelines that punish short sellers.
U.S. District Judge Dale Kimball approved two motions on September 28 to dismiss the lawsuit and ruled that the digital dividend did not manipulate the market and that the revised income statement was protected by the Private Securities Litigation Reform Act. Kimball said in the ruling:
“On the day Overstock announced the dividend, market observers had already realized and publicly stated that the digital dividend would force short sellers to cover short positions in order to avoid violating previous contractual obligations and thus put short sellers in trouble.”
In September 2019, two months after Overstock, which was transformed from a former online retailer to a current crypto retailer, announced its digital dividend, Mangrove Partners Master Fund initiated the lawsuit. The digital dividends distributed by Overstock will be airdropped to its shareholders in the form of “OSTKO” security tokens, at a ratio of one token for every 10 shares.
Mangrove claimed that Overstock banned the sale of tokens within six months of digital dividends in order to make it difficult for short sellers to cover their positions. Mangrove also accused him of artificially creating a short squeeze.
The US Securities and Exchange Commission subsequently launched an investigation into the behavior of Overstock and its executives. In addition to communicating with the company’s former CEO Patrick Byrne, it also required it to produce documents related to dividends.
Judge Kimball ruled that Byrne’s “public contempt” of short sellers (referring to his many derogatory comments on short sellers) has nothing to do with the case because “the distribution of dividends is for legitimate business purposes.”
He summarized the lawsuit as “a classic attempt to defend fraud after the fact.”
Byrne’s lawyer Robert Driscoll told Law360, the US legal news media: “The Federal Securities Act does not act as investment insurance, and the court agreed.”