Overstock Investors Sue Over Stock Drop, SEC Crypto Inquiry

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By Jennifer Bennett

Overstock investors are joining forces in a pair of putative class actions alleging that the online retailer failed to warn them about the risks associated with a subsidiary’s initial coin offering.

Overstock.com Inc. investors alleged that the company misled them about potential risks associated with tZero’s planned ICO, according to two complaints filed April 6 and March 29 in the U.S. District Court for the District of Utah. The company announced March 1 that the Securities and Exchange Commission asked it in February to voluntarily provide information about the offering.

Overstock initially planned to raise up to $500 million through the ICO, and it announced the beginning of a $250 million ICO in December, according to the complaints. The company in March said the SEC investigation would delay the ICO. Overstock, which has said it became interested in blockchain technology in 2014 when it was the first major retailer to accept payments in Bitcoin, didn’t immediately respond to a request for comment.

The company didn’t tell investors about the risks associated with coin offerings, including potential legal issues such as the SEC investigation, the complaints said. The legal status of ICOs remains uncertain. Investors have filed several suits against other ICOs for violations of securities laws, but no federal judge has yet ruled on whether the laws apply.

Overstock also didn’t disclose how much money its blockchain and cryptocurrency subsidiary was losing, according to the complaints. Despite a large increase in Bitcoin prices during 2017, Overstock’s cryptocurrency business lost almost $22 million that year, the complaints said.

The company’s price per share increased over 500 percent to a high of $86.90 on Jan. 8, according to the complaints. When Overstock announced the SEC probe March 1, the price per share fell 4.4 percent in one day, ending at $57.75, the complaints said.

The price per share fell another 5.1 percent when Overstock March 15 announced its ICO would be delayed, and another 15 percent on March 26 when it announced a public offering of 4 million shares, according to the complaints.

The cases are Mahabadi v. Overstock.com Inc. , D. Utah, No. 2:18-cv-00290, complaint filed 4/6/18 and Morris v. Overstock.com Inc. , D. Utah, No. 2:18-cv-00271, complaint filed 3/29/18 .

To contact the reporter on this story: Jennifer Bennett in Washington at jbennett@bloomberglaw.com

To contact the editor responsible for this story: Seth Stern at sstern@bloomberglaw.com

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