Patrick Byrne, the former CEO of eCommerce retailer Overstock, is facing a class-action lawsuit that accuses him, as well as Overstock former chief financial officer Greg Iverson, of securities fraud. The lawsuit has been filed in Utah on behalf of investors who poured money into Overstock securities and alleges that the executive structured dividend payouts as a way to punish short sellers. It accuses Byrne and Iverson of designing the tZero digital token platform in a way that would intentionally cause issues and would manipulate returns.
The lawsuit, a copy of which can be found on Scribd, says that Overstock was offering a digital asset-based dividend specifically out of animosity toward short sellers, adding, “While defendant Byrne had previously, at different times, launched into public tirades over short selling and naked short selling, the tZERO Dividend was his secret plot to finally obtain hegemony over them — and it almost worked.”
The eCommerce retailer launched a new program in July called “Digital Voting Series A-1 Preferred Stock.” It was designed to trade based on Overstock’s tZero blockchain platform, but stipulated that investors couldn’t trade any dividends for six months. This, say the investors, violates rules established by the Securities and Exchange Commission (SEC) and the lawsuit further adds, “While shares traded to a Class Period high of $26.89 each on September 13, 2019, they traded to as low as $15.50 by September 18, 2019, three trading days later, after investors learned that the tZERO dividend was designed to be a short squeeze.”
In that window, Byrne dumped his Overstock holdings, which represented 13% of the company. Byrne had exited the company on August 22 and Iverson then followed in the midst of the stock downturn, leaving on September 17. Byrne picked up around $90 million in the process, but investors believe that the entire endeavor could have been nothing more than a ruse.
The digital-based assets, according to the lawsuit, were nothing more than an attempt to force investors to hang onto their stocks. Seeing that he could force short sellers to sell their holdings, Byrne launched the blockchain-based dividends to push them out, which would also have the added benefit of an increase in Overstock’s stock price.
The plan didn’t work, as the SEC refused to lock up the shares as Byrne had wanted with the A-1 Preferred Stock. However, this didn’t prevent the executive from continuing to move forward as if the SEC had given its approval and the lawsuit asserts that Byrne and Iverson had presented “materially false and misleading statements” in conjunction with Overstock’s financial health. A trial by jury has been requested, but no date has yet been established.
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