UPDATE 2-California court clears way for Overstock.com suit

(Adds comments from Overstock, details, share activity, byline)

By Martinne Geller

NEW YORK, Sept 20 (Reuters) - The California Supreme Court has cleared the way for trial of a suit by online retailer Overstock.com Inc (OSTK.O) against research firm Gradient Analytics and hedge fund Rocker Partners, Overstock said on Thursday.

Overstock alleges that Rocker paid Gradient to publish negative reports about the company and gave Rocker the reports before publication, allowing Rocker time to take a short position in Overstock and profit from its decline.

Since the Overstock suit was filed, other companies have filed similar suits against short sellers.

Overstock is suing Gradient and Rocker for libel, unfair business practices and tortuous interference.

The trial court rejected the defendants' arguments that Overstock's claims should be thrown out because they curbed the defendants' rights of free speech. A state appeals court upheld that decision, and the California Supreme Court refused to review the appeals court ruling.

Overstock Chief Executive Patrick Byrne said in a statement, "This case is about hedge funds illegally enriching themselves at the expense of others. For over two years, these defendants have been hiding behind legal technicalities, delaying procedures, and the risible assertion that their patently illegal behavior was 'free speech.'"

Gradient Analytics Chief Executive Brad Forst said his firm would "defend itself vigorously."

"Today's decision by the California Supreme Court ... provides public companies with the legal tools to stop critical analysis of their financial practices by market analysts, researchers, journalists and others," Forst said in an e-mailed statement.

The U.S. Securities and Exchange Commission ended a probe into Gradient in February and said it would take no action.

Neither Rocker Partners nor its former general partner, David Rocker, could be reached for comment. Rocker, who retired in January amid growing debate about the influence of short sellers in the stock market, told Reuters earlier this year that Gradient had already given Overstock its lowest possible rating before Rocker Partners established its short position.

Short sellers traditionally borrow stock and sell it in the hope that the share price will drop and the borrower will be able to repay the loan for less.

Overstock, which sells excess inventory of clothing, accessories and furniture online, has also brought a $3.48 billion lawsuit against major U.S. brokerages, including Citigroup Inc (C.N) and Morgan Stanley (MS.N), alleging they schemed to drive down the price of the company's stock.

Shares of Overstock, based in Salt Lake City, Utah, were down 29 cents, or 1 percent, at $26.88 in late-morning trade on Nasdaq. That is up 53 percent from its closing price on July 30, but down 65 percent from a high of $76.05 in December 2004. (Reporting by Martinne Geller)