Feb. 14 (Bloomberg) -- Gradient Analytics Inc., provider of research to hedge and mutual funds, said U.S. securities regulators ended an investigation sparked by claims of stock manipulation made by Overstock.com Inc. and Biovail Corp.

The Securities and Exchange Commission recommended no enforcement action after a year-long investigation, according to an SEC letter released by Gradient today. The probe began after online retailer Overstock.com sued Gradient, saying it conspired with a hedge fund customer to issue research aimed at pushing down Overstock.com's shares to help short sales. Short sellers borrow shares to profit by paying for them after a price drop.

``Independent and objective research may be unpopular with some companies, but it is vital information in the equities market,'' said Brad Forst, president and chief executive at Scottsdale, Arizona-based Gradient, in a statement. ``We cooperated fully with the SEC to demonstrate we have nothing to hide.''

Overstock.com and Biovail, Canada's largest publicly traded drugmaker, both claim in lawsuits that Gradient allowed hedge fund clients with short positions in their stock to influence reports containing negative and false information about them. Gradient, whose reports questioned Overstock's accounting, denied the claims and said they companies were aimed at harassing their critics.

A letter signed by Marc Fagel, Associate District Administrator at the SEC's San Francisco office, said the Gradient matter ``has been terminated and no enforcement action has been recommended to the commission.''

Fagel confirmed the authenticity of the letter, declining to comment further.

Gradient, which changed its name from Camelback Research Alliance in 2005, does quantitative and qualitative research on publicly traded companies, including reports on companies that may have earnings problems. The SEC had asked Gradient for information about Overstock.com and analyst reports on Biovail, Gradient said in the statement.

Overstock said last year it received an SEC subpoena in May about the claims and its accounting policies. The SEC also questioned three former Gradient employees last year and subpoenaed journalists, including Dow Jones Co.'s Herb Greenberg and CNBC's Jim Cramer. The agency later withdrew the subpoenas.

Overstock spokesman Jerrod Matkin and Biovail spokesman Nelson Isabel did not return calls seeking comment on the release.

The Gradient case is Gradient Analytics Inc. v Ovestock.com Inc., A113397, California Court of appeal, First District, San Francisco.

To contact the reporters on this story: Karen Gullo at kgullo@bloomberg.net

Last Updated: February 14, 2007 16:04 EST