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You can say many things about the lawsuit that Overstock.com (OSTK) filed against Goldman Sachs (GS) and ten other Wall Street firms in 2007, claiming that the third-rate Internet retailer has been hobbled not by its CEO's serial ineptitude, but by a conspiracy of banks to drive down the share price by the hobgoblin of "naked shorting."

While its allegations are silly, the suit has a very serious purpose, which is to extract the maximum possible cash settlements from all of the defendants. That, and to serve as an ego trip for Overstock's daffy CEO, Patrick Byrne.

This is an expensive nuisance for the banks, costing them millions in legal fees, and I'm sure they'd like to make it go away by throwing some bucks at Overstock. Byrne's hopes along those lines were encouraged when Morgan Stanley (MS), Citigroup (C), Deutsche Bank (DB), Credit Suisse (CS), Union Bank of Switzerland and Bank of New York (BK) cashed out in 2010 for $4.5 million, and Bank of America (BAC) chose to bow out recently, in a settlement whose terms have not been disclosed. I'm sure that made Byrne salivate. That's chump change for the banks, but Overstock needs that money to survive (and pay its lawyers).

But some recent legal filings in the case, pending in state court in San Francisco, lead me to think that Goldman may, possibly, be willing to call Byrne's bluff and fight this one out.

Goldman recently filed legal papers seeking a protective order and sanctions against Overstock.com for seeking to take a video deposition of one of Goldman's senior execs, John F.W. Rogers, executive vice president of GS Group.

A copy of the motion, which was filed in the San Francisco court hearing this wacky case, is available for all to see on the court's website. I've uploaded a copy here.

Goldman has fought this case vigorously, deposing all of the directors and top execs of the retailer. And now, in its motion, it contends that the effort to depose Rogers is so frivolous that it is seeking $3,000 in sanctions against Overstock. Now, obviously that wouldn't pay for the lunches the lawyers consume in two days, but it is a kind of symbolic thing -- an effort to get the judge on its side, and to show Overstock it means business.

It also could be a sign that Goldman is getting teed off at Byrne. If so, that would be the second unwise party that Byrne has antagonized in recent months. The first was Altaf Nazerali, a Vancouver stock promoter who was trashed on Byrne's conspiracy-theory website, Deep Capture, leading to a court action in Canada that has shut down the site.

Byrne has made the most of the suit against the hated "vampire squid" on Overstock's website, devoting a special page to the suit, which he details in overheated prose.

Byrne said, in a web page referring to this extended publicity stunt as a "David and Goliath Story",

Recently, we uncovered evidence of collusive action between Goldman Sachs, Merrill Lynch and other Wall Street bad guys, in a scheme designed to fool regulators and profit illegally at the expense of O.co.

Hearing a trust-fund babe like Byrne refer to himself as a "David" against anyone is nauseating enough, but I doubt that the Goldman people cared that much. The effort to depose Rogers, however, seems to have irritated the firm, which insists that Rogers is a senior exec who doesn't dirty his hands with tawdry stuff like the mechanics of trades.

In a letter filed with the motion, however, an Overstock lawyer said that Rogers had an "extended conversation" with -- aha! -- Treasury Secretary Henry Paulson on September 19, 2008 with, the lawyer implied, the aim of shielding Goldman from the horrors of nekkid shorting.

If so, it would have been an appeal to the wrong Bush administration functionary. The SEC, not the Treasury Department, is the go-to agency for stock trading -- and, as a matter of fact, the SEC had imposed a ban on short selling of all financial stocks on Sept. 18, the day before. This was a ban on all shorting, "naked" or otherwise.

This brings us to why Goldman is so dead set against Overstock deposing Rogers. The reason is that Rogers probably talked with Paulson about real stuff, not the imaginary menace of short-sellers. (Byrne contends that short-sellers, and not the misdeeds of the banks, was the actual cause of the financial crisis. Ironically, he seeks to exonerate the very people he is suing from their role in the crisis.)

What happened on September 19 was far more momentous than the shorting ban: the infamous Troubled Asset Relief Program was established. That was obviously the subject of the conversation, and another conducted that day with CEO Lloyd Blankfein. The Overstock lawyer says in his letter that the shorting ban was imposed on Sept. 19. Actually, it enacted on Sept. 18 and announced before trading on the 19th. By the time Rogers talked with Paulson it was already a done deal.

Personally I'd like to see Rogers testify -- to Overstock's lawyers or anyone, about his conversation with Paulson. Let's see what he has to say. But Goldman lawyers obviously don't cotton to the idea. So that's how things stand. The motion will be argued before a judge on Nov. 28.

So there we have a paradox. In their effort to push Goldman to pony up some big bucks in a settlement, Byrne's lawyers may have riled execs at the company enough to fight this one out. I hope so, and that discovery and depositions by all involved show the depravity of both sides of this silly dispute.

In fact, I'd love to see this case go to trial, just as I'm sure Byrne, bloviating notwithstanding, would like anything but.

Overstock needs cash, and desperately, to stave off default on its bank debt, as Sam Antar revealed recently on his blog. Just across the bay from San Francisco, in Oakland, he's fighting it out with nine California prosecutors, who are seeking $15 million in damages from Overstock for a pattern of consumer ripoffs. He needs some cash to flow in from the west bank of the bay to compensate for whatever he may have to fork over on the east side of the bay.

In the Oakland case he wants a minimal settlement, just as in San Francisco he wants a maximum settlement. The last thing he needs is protracted litigation with an enemy that can afford to fight it out with him. But he is facing just that in both cases, thanks to his hard-nosed lawyers.

The Goldman case will be fun to watch. I guess all I can do is quote Henry Kissinger, who supposedly said about the Iran-Iraq war: "Too bad they both can't lose."

Source: Has Overstock.com Pushed Goldman Sachs Too Far?