Bill would Crack Down on illegal “Naked Short Selling”

The Salt Lake Tribune
By Bob Mims
May 24, 2006

Overstock.com and other small, publicly traded Utah companies concerned about so-called "naked short selling" got a boost when state legislators voted Wednesday to crack down on the illegal practice.

With little debate, SB3004 quickly wound its way to overwhelming approval in both the Senate and House during Wednesday's special session.

"I'm glad to see Utah is taking this vanguard role," Overstock Chairman and CEO Patrick Byrne said. "And I predict this will make Utah the most attractive state for entrepreneurs and small companies in America."

Now awaiting Gov. Jon Huntsman Jr.'s signature, the law would get tough on stock brokers, dealers and investment advisers who engage in naked shorting of stocks - an illegal practice in which shares supposedly on loan are sold but not delivered.

Such "failure to deliver" transactions can result in counterfeit volume that can push down prices for a company's real shares. SB3004 would require sellers caught in such unredeemed short sales to report the incidents to the Utah Division of Securities - and reveal the identities of sellers and buyers, along with dates, locations and prices involved in the bogus transactions.

The bill calls for daily fines ranging from $10,000 to the sum of the sales prices for every bogus share sold. The bill also allows for victimized companies to sue perpetrators of the sales - but only as long as the alleged offending stock firm is registered in Utah.

Sponsoring Sen. Curtis Bramble, R-Provo, is uncertain how effective the law will be outside of Utah. But he hopes other states - and the federal government - will follow suit.

Overstock currently is embroiled in a California state lawsuit against market researcher Gradient Analytics and hedge fund Rocker Partners. The Utah company claims Gradient wrote false reports about Overstock in collusion with Rocker, which then profited by short-selling the company's stock.

Bramble insisted his bill was not just to appease Overstock, a $1 billion company employing thousands of Utahns.

"It's not only [Overstock Chairman and CEO] Patrick Byrne," he said. "This is a problem that exists for all of Utah's publicly held companies when these 'bad actors' engage in illegal naked short selling."

Still, lawmakers clearly knew Wednesday that Byrne badly wanted the legislation: He said so in a letter sent to lawmakers.

"For the past 17 months, Overstock has shown up almost daily on a list published by [the Nasdaq exchange] that shows that Wall Street sharks are selling our stock to unwitting investors, taking their money, but then not delivering the promised stock," Byrne wrote in a letter dated Tuesday.

"I have been unable to stop this illegal activity," added Byrne. "I cannot even determine the identity of these miscreants or the actual volume of 'fake' shares sold each day. I believe transparency is crucial."

Utah Securities Director Wayne Klein agrees.

He said his division is engaged in "gathering information from the industry about short selling practices to determine whether violations are occurring now and, if so, what enforcement actions should be taken."

A nearly identical bill (SB269) fell short of a final vote in the House as the general session expired last March.

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