Judge orders documents in Overstock case unsealed
Lawsuit • Goldman, Bank of America have tried to protectshort-selling records.
Published: March 9, 2012 10:36AM
Updated: March 9, 2012 09:57PM

Goldman Sachs Group Inc. and Bank of America Corp. documents that were deemed confidential in a lawsuit filed against them by Overstock.com Inc. must be made public, a state court judge in San Francisco ruled.

The case involves a 2007 lawsuit by Salt Lake City-based Overstock claiming the banks manipulated its stock from 2005 to 2007, causing its shares to fall. State Court Judge John Munter dismissed the case on Jan. 10, ruling the conduct took place outside of California. Overstock appealed, and also asked Munter to make public those documents he put under seal.

Munter granted Overstock’s request to make public a large chunk of documents. “The subject matter of this action is of substantial public interest. This case concerns publicly traded securities and the operation of the national securities markets, and those are of great public interest.”

Munter also ruled, though, other documents “laced with identifying information about hundreds of thousands of financial transactions of third parties” should remain sealed.

David Wells, a spokesman for New York-based Goldman Sachs, declined to comment. Bill Halldin, a spokesman for Charlotte, North Carolina-based Bank of America, said in an email that the bank is reviewing the decision.

“Our primary goal has been to ensure that the confidentiality of sensitive client information be protected,” Halldin said.

Overstock claims large portions of its stock was the subject of illegal naked shorting,

Short-selling is a legal practice in which brokerages allow investors to borrow and then sell a company’s stock on the hope its price will drop. If that happens, investors then can buy back the stock at a lower price, pocket the profit and return the shares to the brokerages. Naked short-selling takes place when investors sell stock without first borrowing it. In market parlance, the seller is “naked” those shares. The usual outcome is that it creates an artificially high volume of shares for sale, which can drive down a company’s stock price.

The clearing operations at Goldman Sachs and Merrill Lynch, the brokerage acquired by Bank of America in 2009, intentionally failed to locate and deliver borrowed shares for clients, allowing the firms to earn fees and interest on phantom securities transactions, Overstock said in court filings. It sought millions in damages.

Overstock Chief Executive Officer Patrick Byrne was “thrilled” with the judge’s ruling, he said in a statement.

“I could not imagine that a post-2008 public would be denied access to this evidence, which displays in living color the flaws in our capital markets and in the regulatory structure that governs them,” he said.

“Now the public will have a window through which to view this evidence and judge for itself the fraudulent and systematically risky behavior at issue in this case,” he said.

Four media organizations, including Bloomberg LP, the New York Times, Wenner Media and The Economist, intervened in the case and joined Overstock’s motion for the unsealing.

The case is Overstock.com v. Morgan Stanley, CGC-07-460147, Superior Court of California, San Francisco.