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An eagerly awaited court ruling in Vancouver, where Overstock.com (NASDAQ:OSTK) CEO Patrick Byrne is being sued for libel, was handed down on Thursday, and it's horrendous news for the erratic Byrne and his long-suffering shareholders:

Byrne has failed in a jurisdictional challenge and will face libel charges in Canada, one of the worst places on earth for libel defendants.

I've uploaded the court's ruling here.

It's a technical document that doesn't go into the substance of the allegations by Altaf Nazerali, a Vancouver stock promoter. As I've indicated previously, Nazerali was the subject of wild allegations on Byrne's Deep Capture website, which accused him of being an accomplice of international terrorists.

Read it and, if you are an Overstock shareholder, don't be afraid to weep. What this means is that Byrne, who has been an absentee CEO for years as he pursues bizarre "naked shorting" conspiracy theories, will be mired for months if not years in a famously pro-plaintiff jurisdiction, slugging it out in costly and, I suspect, ultimately unproductive litigation.

While Byrne's absence from the helm at Overstock is hardly a negative, per se, what it means is that the company will continue to be adrift, and that its corporate reputation will continue to be depressed by its CEO's escapades. That can't help but further depress the company's share price, which has recently been flirting with 52-week lows.

This is not a healthy company. Overstock has been teetering on the brink of insolvency, and has had to lay off employees. In addition to this libel suit, which may well involve the company as well as its CEO, Overstock faces a consumer fraud lawsuit in California that isn't going very well.

The only plus for Overstock is that the company's heavy-handed press intimidation tactics have thoroughly cowed the Utah media, which hasn't breathed a word about the libel suit as of this writing.

This libel suit is going to be fun to watch. Something tells me that Mark Mitchell, the former journalist who now spends his days spinning fairy tales for Byrne, is going to be in for some tough questioning at his deposition -- unless Byrne decides to throw him under the bus, which any rational co-defendant would do under the circumstances.

As it grinds through the courts, this litigation won't be fun for the defendants. As I pointed out in my last article on this subject, Mitchell was so incredibly sloppy that he actually confused Nazerali with the wrong guy, the CEO of the Aga Khan Foundation, at one crucial point in his article. After Nazerali pointed that out to him, Mitchell not only did not print a correction, but actually added a photo of the Aga Khan to magnify the goof, according to court papers.

That's not terribly surprising. I've had dealings with Mitchell, who has made up some nutty stuff about me and placed it on his web site. The man is just an utter fabulist. He actually called me before his employment by Byrne was known, and lied through his teeth, saying that he was functioning as a journalist and hadn't yet found a buyer for an article he was researching. The sordid details are here.

Byrne later admitted that he was on the other line, giggling, while Mitchell was engaged in what is known as "pretexting" -- working for a corporate sponsor while pretending to be a journalist.

These two characters are now facing a well-heeled and angry plaintiff, in a civil justice system that has a low threshold of tolerance for that kind of behavior. If it gets to the point that they are deposed, Byrne and Mitchell are likely to be probed for the intimate details of their private lives, including any psychiatric issues they may have had.

Nope, it won't be fun. I know a reputable journalist who spent days being raked over the coals for responsible reporting, in a libel suit filed in a U.S. court. Here we have faux journalists in a horrid jurisdiction who have engaged in irresponsible reporting and outright lies. Yikes.

I imagine that Mitchell will try to hide behind "journalist privilege," so as to lay the foundation for an appeal and for the predicted p.r. offensive. The problem for Byrne is that Deep Capture is a p.r. operation, and was officially told as such by the Society of American Business Editors and Writers

But Byrne will contest that, I guess, while the meter runs. Libel defense can run into the millions of dollars, easily. Even if the verdict proves to be unenforceable in the United States, it will be a major blot on Byrne and a public relations disaster, proof that his Deep Capture site is a pack of lies.

Mitchell's modus operandi, as I explained here, is to take well-worn tales about specific individuals, culled from reporting by past journalists whom he doesn't credit, and then dress them up with fairy tales from "sources" that exist only in his imagination.

In a 2009 article I described how Mitchell appropriated some of my reporting on mob-linked brokerage firms, ran it through the dream machine, turned conventional pump-and-dump crooks into "naked shorts," and in the process screwed up most of the easily verifiable facts.

Byrne has yet to reinstate the Deep Capture articles on Nazerali, for obvious reasons. Incredibly, Mitchell left the following comment on the Deep Capture site on Feb. 6:

Update: I will start republishing the "Global Bust-Out" story, chapter by chapter, in just a few days. I have added a lot of information-need to polish and fact check, but should be ready to go soon.
Just letting you know that the story has not been killed, that the delay is just me putting in more work, and that the story will be back soon with more, not less, information.

Bears in the stock were, I'm sure, heartened by the prospect of such incredible stupidity.

So, what's next? I see two possible scenarios.

One is more stupidity and hubris, such as Mitchell hinted in his recent post, accompanied by a full-blown legal offensive in Canada, replete with expensive appeals and a p.r. campaign, so as to make Byrne appear like a victim of a horrible miscarriage of justice (in anticipation of losing, as he surely will).

The other possibility is that Byrne throws Mitchell under the bus, and cuts a deal with Nazerali.

Knowing Byrne, my advice is: bet on the former, but don't totally exclude the possibility of the latter if the pain becomes unbearable. And believe you me, the pain is only just beginning.

Source: Overstock.com CEO Will Face Libel Charges In Canada