Overstock 'happy' to assist Biovail lawsuit

Date: Tuesday, February 28, 2006
Author: LEONARD ZEHR AND PAUL WALDIE - Globe & Mail

Biovail Corp.'s lawsuit against a Wall Street hedge fund was driven by a "wealth of information" it received from an Internet retailer, which also claims it was a victim of short sellers of its stock, and three former employees of an Arizona securities research firm.

"Biovail lawyers called us about our lawsuit against Gradient [Analytics Inc.] and how we put it together," said Jonathan Johnson, senior vice-president of legal affairs for Overstock.com of Salt Lake City. "We showed them the affidavits we had from three former employees of Gradient. Biovail contacted the three former employees and obtained a wealth of information from them just as we did."

Mississauga-based Biovail last week accused U.S. hedge fund SAC Capital Management LLC and other companies and individuals of orchestrating an alleged scheme of market manipulation and misinformation that helped drive down its stock price several years ago. It is seeking damages of $4.6-billion (U.S.). None of the allegations have been proven in court.

A common link in the Biovail and Overstock.com lawsuits is Gradient, a Scottsdale, Ariz.-based securities research firm. It has been accused of generating negative reports at the request of hedge funds that specialize in short-selling strategies, which profit from a drop in a target's stock price.

Gradient has previously denied the allegations, calling the charges "false and malicious," and claimed Biovail and Overstock.com had used dubious accounting practices to inflate results.

"We have a common interest with Biovail in that we both think Gradient has broken the law," Mr. Johnson said.

Mr. Johnson said Biovail contacted Overstock.com shortly after it sued Gradient last August. "Our attorneys have been working independent of theirs, but when they've asked us for leads, we've been more than happy to provide them."

In its lawsuit against Gradient and U.S. hedge fund Rocker Partners LP, Overstock.com included declarations from three former employees of the research firm. All three alleged Gradient worked closely with some clients and tailored research reports to suit their suggestions.

"In the writing of these negative research reports, it was the common business practice of [Gradient] to discuss in advance of publications, drafts of these reports with the customer that had requested the reports," alleged Daryl Smith, who worked at Gradient from 2002 to 2003.

Another former employee, Robert Ballash, alleged that Gradient, formerly known as Camelback Research Alliance, said in its promotional material that customers had the opportunity to "influence the reports," according to his declaration.

Biovail was not required under New Jersey law, where it filed its statement of claim, to include affidavits from the former Gradient employees. However, the drug maker claims to have additional witnesses and e-mail evidence to support its claim.

Gradient is also being investigated by the U.S. Securities and Exchange Commission. In a bizarre twist yesterday, the SEC backed down on subpoenas it sent to two reporters seeking documents related to an investigation of Gradient. The withdrawal of the subpoenas came after a rare admonishment of SEC staff by commission chairman, Christopher Cox.

"The issuance of a subpoena to a journalist which seeks to compel production of his or her notes and records of conversations with sources is highly unusual," Mr. Cox said in a statement.

Mr. Cox told Bloomberg News he plans to hold a meeting of commissioners within a few days to consider when it is appropriate to subpoena journalists. One of the reporters who received the subpoena confirmed yesterday that it had been withdrawn.

"But bottom line is that I'm no longer being asked to provide the SEC all of my "unpublished" communications, including e-mails and phone records, between me and people and organizations," said Herbert Greenberg, a columnist for Dow Jones' MarketWatch.com. Mr. Greenberg referred a request for an interview to lawyers for Dow Jones.