Overstock.com goes after San Diego nay-sayers

Two guys sloshing it up in a bar decide they will never be real men until they kill a bear. They mortgage their homes, buy the most expensive bear-killing equipment and, with their wives and children weeping, depart on a three-week trip to stalk the fearsome grizzlies. Three hours later, they return, explaining, "The woods were scary. We were driving around a wide curve when we saw a sign, 'Bear Left.' So we came back."

Dim bulbs, those bear hunters. The same is usually true of corporate bear hunters. In the stock market, bulls want to push stocks up and bears want to drag them down. Bulls and bears are in an eternal tussle. But some companies waste precious resources and management time trying to stalk and silence the bears on their stocks. Several San Diegans are involved in epic battles with companies that are trying to quash any bearish sentiment.

On September 11, a superior court judge almost jailed La Jolla's Dr. David Katz for expressing negative remarks about Avanir Pharmaceuticals, a former San Diego biotech that last year moved its headquarters to Orange County. The company had booted out Katz, its founder, in the late 1990s, suggesting he was mentally unbalanced. The two sides settled and promised not to say naughty things about each other. But as Avanir's performance and stock plunged, Katz began posting critical messages on online chat boards. The judge decided he was in contempt of court.

What's amusing is that the most damaging information about Avanir is in its own public filings with the Securities and Exchange Commission. It admitted in a proxy statement that the company was spending money on a potential drug that was financially controlled by the company's chief executive, who had promised in his employment agreement that he would have no conflicts of interest. In its most recent filing, the company reveals that it has an accumulated deficit of a staggering $248.2 million, and in the past 12 months, eight top executives, including the chief executive and chief financial officer, have left the company. On December 5 of last year, Avanir doled out more than $700,000 in retention bonuses to seven executives. "Five of the seven left anyway. That is disgraceful," says Rich Kralick of Long Island, who has lost a bundle in the stock.

On September 20, the California Supreme Court refused to review a plea from a Scottsdale research firm, Gradient Analytics, and a New Jersey hedge fund, Rocker Partners, to throw out a lawsuit by a Salt Lake City company, Overstock.com. The company -- another big money loser -- wails that Gradient and Rocker have besmirched its reputation. Overstock, which peddles closeout brand merchandise online, has also filed suit against major Wall Street brokerage houses on similar claims. The Gradient suit will proceed in Marin County and the Wall Street suit in San Francisco.

Deeply involved are two San Diegans, Donn Vickrey and Herb Greenberg. Vickrey, a cofounder of Gradient Analytics, heads its research effort from Carlsbad. He has a PhD in accounting and was once a professor of accounting at the University of San Diego. Greenberg, who lives in Carmel Valley, is a columnist for the Wall Street Journal and MarketWatch.com and is a frequent commentator on CNBC. In his columns, Greenberg frequently quotes Vickrey.

Greenberg isn't named in the suit, but Overstock claims that in an affidavit, a former Gradient employee charged, "It appeared to me that Rocker, Vickrey, and Greenberg were coordinating their attacks on Overstock, and Vickrey and Greenberg were coordinating the content and timing of their various reports on Overstock to please Rocker."

Gradient strongly denies the allegation, and Greenberg scoffs, "Totally laughable." Greenberg says he has "no coordination with anybody but my editors."

Overstock's chief executive, Patrick Byrne, doesn't deny that his pursuit of critics is a "jihad" and a "crusade." Overstock charges Gradient and Rocker with libel, unfair business practices, and interference with its operations. It claims that Gradient would delay releasing a report until Rocker had taken a position betting the stock would go down -- an odious practice called "front-running." Gradient strongly denies the charge. Greenberg points out that the Securities and Exchange Commission investigated Gradient's business practices for a year and terminated the probe early this year. The investigation began after Overstock filed its lawsuit. The securities agency looked over hundreds of thousands of Gradient documents and interviewed numerous witnesses, says Gradient.

In spring of last year, the SEC launched a probe of Overstock's accounting practices, and that investigation is still ongoing.

Greenberg has ridiculed the suit in his columns. So has Joe Nocera of the New York Times, who pointed out in May of this year that Rocker wasn't even a Gradient client when Gradient began issuing tough reports on Overstock's accounting. The Reporters Committee for Freedom of the Press says that Overstock's suit should be dismissed because it threatens "serious business reporting." The Chartered Financial Analyst Institute makes similar First Amendment arguments in support of Gradient.

Again, though, one can find out plenty about Overstock by going to its public filings. It has a cumulative deficit of a whopping $233.8 million. Revenue soared for several years but has declined for four consecutive quarters. The company has never had a profitable year, and losses are steepening.

In its most recent quarterly filing, Overstock confesses, "The use of management's time and attention in connection with the [Gradient and Wall Street] litigation and related matters may reduce the time management is able to spend on other aspects of our business, which may have adverse effects" on those areas.

Amen.

The judge awarded Avanir the $1.3 million in legal fees it spent pursuing Katz, but the case is likely to be appealed. This company has been in the red every year since 2002, with losses rising steadily. It is developing a drug for involuntary, uncontrollable laughing and crying. The Food and Drug Administration says the drug may be "approvable," but its safety and efficacy are questionable, and the agency has problems with Avanir's statistical methods. Avanir says it needs two more years of work on the drug, but the company suffers from "limited capital resources." Tamara Vaughn of Cheney, Washington, who lost a slug of money in the stock, says the company kept assuring investors that there were no safety and efficacy concerns, when there clearly were. Avanir says it disclosed possible problems.

Records show that between late 2004 and August of 2005, Avanir sometimes said the Food and Drug Administration had granted expedited review of that drug but other times stated that the agency might give such priority, and there was no assurance it would. Avanir says the discrepancies were inadvertent.

Avanir went to court to get the identity of one investor making negative comments online. The judge said that the company was violating free speech and awarded the poster more than $50,000. "Avanir also initiated several John Doe lawsuits against Yahoo! message board posters," says Kralick. Avanir claimed it would suffer "severe damage if the posters were not stopped." Poor dears.

Meanwhile, I went on chat boards for both Avanir and Overstock and found that the bulls and bears are scrappy as ever. Some of the invective darts, aimed at other investors or company managements: "pussball," "lying scumbag," "slimeball with no conscience," "weasel," "Russian grifters," "crud peddler." You get the picture. Remarked a poster, "One must have a mental disorder to buy Avanir." Said another of Overstock shares, "Lipsticked pig outhouse paper quality common stock."

This is part of the bull/bear game. Don't buy stock in a company trying to be a bear slayer; managers may be sissies who can't run a business in this competitive world.