May 25 (Bloomberg) -- Overstock.com Inc., an online seller of excess inventory, said Ray Groves resigned due to the company's $3.48 billion lawsuit against brokerage firms, becoming the second director in three months to do so.

Groves, the former chairman and chief executive officer of accounting firm Ernst & Young, resigned yesterday in a letter to Chief Executive Officer Patrick Byrne, citing ``the company's prime broker suit,'' Salt Lake City-based Overstock said in a regulatory filing today.

Groves left the company almost four months after Overstock sued Morgan Stanley, Goldman Sachs Group Inc. and other brokerages for allegedly causing the company's shares to fall almost 75 percent since the end of 2004 by manipulating the stock market. Groves, who ran Ernst & Young from 1977 to 1994, had been a director since 2005.

John Fisher, a former executive with Crocker Bank, since acquired by Wells Fargo & Co., stepped down in February because he opposed the lawsuit.

With Groves' and Fisher's resignations, a majority of Overstock's directors aren't independent, the company said in the filing.

Overstock spokesman Judd Bagley declined to comment further.

Shares of Overstock fell 6 cents to $18.40 at 4:01 p.m. in Nasdaq Stock Market composite trading today. The stock has advanced 16 percent this year.

To contact the reporter on this story: Danny King in Los Angeles at dking19@bloomberg.net

Last Updated: May 25, 2007 16:45 EDT