Overstock.com, Inc. v. Goldman Sachs & Co.
180 Cal. Rptr. 3d 269
Cal. Ct. App.2014Background
- Overstock and investors allege naked short selling manipulated Overstock stock, violating California Corporate Securities Law and related state claims, with a belated New Jersey RICO theory added mid-litigation.
- Regulation SHO regime and market-maker exemptions are discussed; Overstock was a threshold security with persistent fails to deliver.
- The defendants include two Goldman entities and two Merrill entities; clearing firms execute, clear, and settle trades central to the alleged scheme.
- SEC actions against Hazan, Arenstein, and others are cited as evidence of abusive naked short selling and market manipulation.
- The trial court granted summary judgment on California claims and denied leave to amend for the New Jersey RICO claim; on appeal, the New Jersey RICO claim is affirmed as to pleading/standing, and Merrill Clearing is reversed on the California claim, with others affirmed.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| NJ RICO pleading adequacy | Overstock argues NJ RICO meets specificity and reliance standards. | Defendants contend lack of NJ conduct in NJ and lack of actionable predicates. | Demurrer upheld; leave to amend denied. |
| Scope of 25400(b) liability to clearing firms | ‘Effect’ includes entities that execute/clear/settle trades, not just beneficial sellers/buyers. | Liability limited to primary actors; aiding/abetting not liable. | 25400(b) reaches clearing firms; liability requires primary actor conduct. |
| Primary liability standard for clearing firms | Clearing firms participated beyond normal clearing services and orchestrated/initiated trades. | Clearing firms merely cleared for clients; not primary violators. | Triable issue as to Merrill Clearing’s primary liability. |
| Where the manipulated conduct occurred | California-based conduct, including SF clearance activities, suffices as ‘in this state.’ | Actions occurred outside California; lacking connection to CA. | Evidence supports ‘in this state’ finding; conduct connected to California. |
| Preemption by federal securities laws | State-law market manipulation claims coexist with Regulation SHO enforcement. | Federal regime preempts state analogs. | Preemption rejected; state-law claims survive against some defendants. |
Key Cases Cited
- Diamond Multimedia Systems, Inc. v. Superior Court, 19 Cal.4th 1036 (Cal. 1990s) (statutory interpretation of market manipulation)
- California Amplifier, Inc. v. RLI Ins. Co., 94 Cal.App.4th 102 (Cal. Ct. App. 2001) (improper expansion of damages/liability under Cal. Corp. Sec. Law)
- Kamen v. Lindly, 94 Cal.App.4th 197 (Cal. Ct. App. 2001) (distinguishing liability scope under securities statutes)
- Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (U.S. Supreme Court 1994) (aiding and abetting no liability under private RICO-like claims)
- Levitt v. J.P. Morgan Securities, Inc., 710 F.3d 454 (2d Cir. 2013) (clearing firm liability standard; primary vs. secondary liability framework)
- In re Mutual Funds Inv. Litigation, 384 F.Supp.2d 845 (D. Md. 2005) (clearing and late-trade liability; standard for primary liability in complex schemes)
- Blech Securities Litigation, 961 F.Supp. 569 (S.D.N.Y. 1997) (discussion of clearing broker liability for manipulative schemes (early cases shaping standard))
- Electronic Trading Group, LLC v. Banc of America Securities LLC, 588 F.3d 128 (2d Cir. 2009) (Reg SHO locates/delivery; market-maker exemption interpretation)