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Federal securities officials are investigating Gradient Analytics Inc. over allegations it conspired with a well-known Wall Street hedge fund to drive down the share prices of online retailer Overstock.com.
Documents obtained by The Salt Lake Tribune Thursday show inquiries have been under way since at least Oct. 6, when three former employees of the financial research firm were questioned by San Francisco SEC officers.
In letters dated Oct. 11, Mark Fickes, an attorney with the SEC's Division of Enforcement, acknowledges the cooperation of ex-Gradient employees Daryl Smith, Demetrios Anifantis and Robert Ballash and provides a case number for the probe. Included is a document advising them of their rights as witnesses in possible enforcement proceedings.
Messages left for Fickes were referred to Marc Fagel, head of enforcement for the SEC in San Francisco. Fagel said policy prohibited him from discussing or confirming any pending investigations.
Smith, Anifantis and Ballash earlier discussed in affidavits their former employer's relationship with Rocker Partners, a New Jersey-based hedge fund. Those documents were included in Overstock's August lawsuit charging Gradient and Rocker with unfair business practices and corporate libel.
Both Gradient and Rocker have denied all allegations. On Tuesday, Gradient counterpunched, seeking dismissal of Overstock's suit on grounds the Utah company was seeking to suppress its critical reviews.
In a statement Thursday, Gradient insisted it has "no direct knowledge of any SEC inquiry that may be under way. . . . "Should the SEC choose to contact the company, Gradient looks forward to . . . getting to the bottom of the false accusations that have been circulated by Overstock.com."
Brent Baker, a Salt Lake City attorney representing Smith, Anifantis and Ballash, said it was standard procedure that the target not immediately know it is being investigated. "They always work from the outside in," he said.
"I worked for the SEC for almost 14 years," Baker added. "There is, absolutely, an investigation by the SEC in the matter of Gradient Analytics."
In his affidavit, Anifantis swore he heard telephone conversations in which Rocker executives asked Gradient to emphasize negatives and downplay positives when writing about Overstock.com. Ballash and Smith similarly swore to instances where other Gradient clients were purportedly able to sway stock research.
Reached at his home in Scottsdale, Ariz., Ballash said SEC questioners seemed particularly interested in details during his hourlong recorded interview under oath, including identities of alleged participants in key conversations and decisions involving Gradient reports.
"They asked background questions about various relationships [at Gradient], who was there at meetings, how all that kind of worked," Ballash said. "It seemed like they were fact finding; they already had a good feeling for the case in general."
Added Smith, questioned for nearly 90 minutes: "They sure sounded like they would pursue it further."
Ballash, Smith and Anifantis -- the latter could not be reached Thursday -- contend they were fired after questioning Gradient's relationship with Rocker. According to published reports, Gradient claims that the trio was fired for reasons that range from violating policy on taking documents off-site to poor performance.
In its complaint, filed with the Superior Court of California for Marin County, Overstock contends that Rocker specializes in short selling -- an investment strategy where stock is borrowed and sold, with sellers betting they can buy back the stock and bank the difference when share prices fall.
Beginning in June 2003, Gradient purportedly published -- at Rocker's behest, Overstock contends -- nearly 60 negative reviews of the Utah company. During that period, short selling of Overstock shares accelerated. Eventually share prices tumbled from a high of $77.18 in January 2005.
Overstock contends its stock never fully recovered. Even with an 11 percent boost Thursday, the company's shares closed at $37.09.