Gradient Analytics Urges California Supreme Court to Protect Landmark Free Speech Case, New York Times v. Sullivan

Business Wire, July 9, 2007

SCOTTSDALE, Ariz. -- Citing the impact on free speech protections provided under the landmark court case New York Times v. Sullivan, Gradient Analytics, Inc., filed a petition late Friday with the California State Supreme Court requesting review and reversal of an appellate court decision, which denied the independent research firm's motion to dismiss a defamation lawsuit filed by the online retailer, Overstock.com.

In May, the California Court of Appeal (First Appellate District, Division Four) allowed the lawsuit to proceed despite arguments made under California's anti-SLAPP statute that the case will have a negative impact on the ability of financial analysts, journalists and researchers to publish detailed reports on controversial subjects. The anti-SLAPP statute is a law to prevent plaintiffs from bringing non-meritorious but costly defamation lawsuits to punish speech of which they disapprove.

Gradient CEO Brad Forst said:

"The Court of Appeal decision cracks the foundation of the free speech defense provided under the California statute. The decision we are challenging is relevant to any critic, researcher, consumer advocate, investigative journalist, or market analyst who questions the practices of a publicly-traded company. If the court decision stands, presumably the Enrons and Worldcoms of the world now have a legal tool to quash efforts to shed light on corruption and malfeasance. This is the argument we hope the Supreme Court will hear."

Overstock filed its lawsuit in August 2005, arguing that Gradient colluded with a hedge fund to write negative research reports about the company and, as a result, drive down its stock price. Shortly after, the U.S. Securities and Exchange Commission began an investigation into the Overstock charges alleged in the lawsuit. In mid-February 2007, the SEC terminated its investigation of Gradient, recommending no enforcement action. The SEC currently is investigating Overstock's financial practices.

In the petition, Gradient argues that there is a split of authority in California about the standard of proof in an anti-SLAPP case. Gradient also asserts that the New York Times malice standard was not applied correctly.

The Court of Appeal suggested that malice was inherent under Gradient's business model, but did not require Overstock to prove that Gradient had made any particular statement with knowledge of its falsity.

Forst said:

"If that's now how the New York Times malice standard will be applied, then every news organization that writes critically of public entities, such as the New York Times, The Wall Street Journal or Consumer Reports, will be subjected to costly and unmeritorious defamation lawsuits from public companies with unlimited resources that don't like what's being said about them.

Gradient's business model is based on financial statement analysis and soliciting opinions from a wide variety of sources who have views about which reasonable people can differ. We then analyze and assimilate that information into our reports, which may frequently be highly critical of a particular business. In doing so, our research and the critiques of others play a vital role in ensuring the efficiencies and fairness of the US equities market."

About Gradient Analytics

Gradient Analytics is the country's leading independent equities-research firm. Gradient's research has been shown to uncover issues that have a significant impact on equity valuations but often are not impounded into securities' prices. Gradient's financial engineers routinely conduct directed research related to earnings quality and accounting practices for 2,400 publicly traded companies.