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Gradient seeks dismissal

Gradient Analytics Inc., an Arizona-based research company, has asked a California appeals court to dismiss a lawsuit accusing it of conspiring to drive down shares of Salt Lake-based Overstock.com Inc.

Gradient, which sells research to hedge and mutual funds, said in an appeal filed Friday in San Francisco that its reports criticizing Overstock.com were protected free speech. Overstock.com failed to prove that the comments were published with "actual malice," Gradient said. Actual malice involves making statements knowing they were false or with reckless disregard for the truth.

"This closely watched lawsuit represents an ambitious attempt to remove from the field of free debate all frank discussion of the quality and competence of corporate management," Gradient said in an e-mailed statement.

Overstock's lawsuit, and a similar one filed by Canada's Biovail Corp., accuse Gradient of teaming up with hedge fund customers to issue critical reports to help the customers benefit from short trades after their shares fall.

The Overstock lawsuit sparked a Securities and Exchange Commission probe. Gradient denies wrongdoing and says Overstock is trying to silence its critics.

Overstock's lawsuit filed in August charges that starting in June 2003, Gradient released false and misleading reports with information supplied by hedge fund Rocker Partners LLC that helped drive its stock down from a high of $77.18 in January 2005, damaged its reputation and made it difficult to raise investment capital. Rocker has denied the claims.

Short sellers borrow securities in hopes of making a profit by paying for them after the price drops.

Overstock said April 28 that its first-quarter loss widened to $15.9 million and forecast a loss in the second quarter. Overstock has posted an annual loss every year since it went public in 2002.

A judge in San Rafael, Calif., refused to throw out the suit in March. Gradient said in its filing Friday that Overstock hasn't shown that Rocker Partners supplied any of the statements it claims are defamatory.

"Overstock fails to explain why a source that maintains a 'short position' in a particular company's stock is any more biased than a source that maintains a 'long' position in that stock, other than the fact that the short seller's opinions are a lot less likely to make the company's executive smile," Gradient said in its filing.

Scott Blevins, an Overstock spokesman, said, "The California judge has looked at all of this and has said we have a high probability of winning."

The Securities and Exchange Commission has subpoenaed Overstock.com and questioned three former Gradient employees about the allegations. The SEC also issued subpoenas to journalists before withdrawing them.