Federal regulators are stepping up their intervention into a colorful Wall Street battle featuring a prominent short seller with an uncanny ability to consistently entice the press to lambaste companies in which he holds short sales (a bet the stock price will decline).

The short seller is David Rocker of hedge fund Rocker Partners, and he is battling against the beleaguered CEO and chairman of online retailer Overstock.com of Salt Lake City, Patrick Byrne. Both companies are already under investigation by the Securities and Exchange Commission.

Also involved are select members of the business press, including some from Dow Jones & Company, who have repeatedly pounded Overstock.com with negative stories.

The Justice Department is inquiring into the situation, having already discussed it with regulators from at least one securities exchange and possibly Overstock.com, The New York Sun has confirmed. The Justice Department usually investigates Wall Street cases in conjunction with the SEC.

If it, too, commences an investigation – which it may have already done – it raises the prospect of potential criminal action if warranted. The Justice Department declined comment, but a regulatory source confirmed its interest in the matter.

It all stems from a suit Overstock.com filed last August that charged that Rocker Partners, which had shorted its stock, had conspired with Gradient Analytics, an independent research outfit based in Scottsdale, Ariz., to denigrate its business for a profit. In its suit, which also includes Gradient, Overstock.com alleged the research firm had “knowingly served as a shill for Rocker Partners.” The extent of the damages to be sought could top $1 billion, an Overstock.com attorney, Wes Christian, said.(Rocker Partners recently changed its name to Copper River Partners to reflect Mr. Rocker’s planned retirement from the firm in January 2007.)

After the company’s suit was filed, Mr. Byrne said Overstock.com was contacted by seven federal and state agencies. He declined to name them or to comment whether the Justice Department was included. He would only say: “This is not just an SEC investigation.”

Both Rocker Partners, which manages $1.2 billion in assets, and Gradient have denied any wrongdoing.

“We’re launching missiles at the bad guys,” Mr. Byrne told the Sun. “They’ve turned this into a war and I’m going on the defensive.” He added: “These guys have even hired private eyes who have investigated my girlfriend.” He described Gradient as “a hatchet for hire shop” that would do negative reports for Mr. Rocker, allow him to edit the copy, and then hold the report, enabling him to take a (short) position before it was issued. “The independent research is not independent; it is dictated by Mr. Rocker,” he said.

Mr. Byrne, who said he was confronting “a closed circle of corruption,” also charged that Gradient had taken a short position in a hedge fund it covertly operated. “The SEC has spoken to our witnesses,” he said, at least some of whom he described as former Gradient employees, who he suggested could validate his claims.

Mr. Rocker did not respond to calls seeking comment.

A public relations spokeswoman for Gradient, Karen Hinton, characterized Mr. Byrne’s allegations as “old and tired and completely unfounded.” Asked whether Gradient had received any queries from the Justice Department, Ms. Hinton said, “We do not comment on requests from government agencies.”

On a related matter, Mr. Byrne complained about the enormous number of “phantom shares” of Overstock.com in the market, a reference to the additional fictitious shares created by naked short selling. That refers to the practice of selling shares, often electronically, that the seller doesn’t own and haven’t been borrowed. Mr. Byrne cited several examples of overseas investors having bought the company’s shares, which have yet to be delivered many months since the purchases. There are 20 million Overstock.com shares outstanding, and Mr. Byrne figures there are two to three times that number if you include the phantom shares.

He says many other companies are also afflicted with the problem of fictitious shares, which he views as a major Wall Street scandal.

The SEC tells me such action is essentially illegal, although market makers are permitted to engage in such activity under special situations.

Mr. Byrne, who owns 7 million Overstock.com shares, also took pot shots at the press, citing a group of reporters who, he said, “could be counted on to consistently attack companies that Mr. Rocker is short.” Surprisingly, one veteran Dow Jones staffer told me he thought some of his colleagues had gone overboard in allowing Mr. Rocker to repeatedly use them as attack dogs against Overstock.com. In contrast, another Dow Jones staffer who has written negatively about Overstock.com praised Mr. Rocker. Both declined to be named.

In its investigation, the SEC subpoenaed journalists from several news organizations, including Dow Jones and CNBC, but later buckled under editorial pressure and withdrew its request. It did, though, reserve the right to question the journalists.

Overstock.com, which has not had a profitable year since its 1999 inception, has not escaped the battle unscathed. It recently received an SEC subpoena requesting documents related to its accounting policies, communications with analysts, and trading in the company’s stock. Mr. Byrne minimized the importance of the SEC subpoena, describing it as “a laundry list” of what the SEC normally asks for.

Shares of Overstock.com, down sharply from their 52-week high of $48.65, closed Friday at $22.22.

dandordan@aol.com