Tempers Flare over Ending Utah Law
Debate on repealing a statute on short selling prompts a verbal clash
By Bob Mims
The Salt Lake Tribune
February 27, 2007
Under threat of a lawsuit by brokers, legislators Monday were just one step away from killing Utah's short-lived law targeting alleged stock trading manipulation.
And Overstock.com CEO Patrick Byrne, who was a prime mover behind the measure's passage in a May special session, was livid. "This is worse than mere betrayal," he said. "It is selling out the state of Utah."
That conviction boiled over during a Monday morning meeting among Byrne and other Overstock officials, legislators, state lawyers and brokerage representatives. At one point, Byrne had a heated exchange with Michael Ostermiller, a South Ogden attorney representing the Securities Industry Association.
Byrne had told lawmakers an unidentified national journalist told him he "smells skunk" in the rapid genesis of SB277, introduced and passed Friday by the Senate to repeal the naked shorting statute. If something proves to be amiss, Byrne said, he would make sure the facts were known.
During the increasingly angry banter that followed, Ostermiller and Byrne began talking about which side of the debate had more "guts." At some point - accounts differ who first uttered the phrase - the words "take it outside" came up. According to Jonathan Johnson, Overstock's senior vice president for legal and corporate affairs, it was Byrne who responded: "Is that an offer?"
Nothing more came of the dust-up, and Byrne later told The Salt Lake Tribune that he and Ostermiller had since talked. "We made up. [He's] a gentlemanly guy," Byrne said.
Ostermiller insists he never meant for his comments to be interpreted as an invitation to fight Byrne - a former boxer and tae kwon do black belt. Rather, Ostermiller says he and the Overstock founder "were enthusiastically debating. There was no real conversation about anything 'going outside,' There was a spirited, energetic debate on a complex issue. Patrick Byrne and I have spoken since and it's over. I don't harbor any ill will."
Still, Byrne remained miffed at Senate Majority Leader Curtis Bramble. It was the Provo Republican who carried SB277, reversing his sponsorship of the earlier bill to crack down on "naked short selling."
Short-selling occurs when shares are borrowed, sold and then redeemed with the investor profiting from a stock's lower price. Naked shorting involves selling stock short without having first actually borrowed it - a practice that critics say artificially inflates volume and drives down share prices illegally.
Bramble says he decided to sponsor SB277 because state attorneys, securities industry experts and others had convinced him Utah could not successfully defend the law in court. The special session statute sought to curb naked shorting through fines for failures to deliver borrowed stocks.
The Securities Industry Association sued the state over the law within days of its passage, contending Utah was impinging on federal regulatory authority. Bramble said the brokerage trade organization had agreed to pay its own legal expenses and drop its suit if the law were repealed.
If there was betrayal, Bramble says, the finger points at Overstock.
"We relied on certain facts and legal representations [from Overstock] during the last session," the senator said Monday. "Since we passed it, with the exception of Overstock's counsel, every other legal [authority] has advised us we would lose.
"We also anticipated a number of other companies would support this [but] no others have come forward to say this would help them, address their problems or that the law should be enforced," the senator added.
No guts, no glory, Overstock's Johnson countered, saying SB277 showed up in the Senate late last week and had passed 27-1 with one abstention before the company knew what was happening. By late Monday afternoon, the bill had completed three readings in the House. Carried by Rep. Stephen Urquhart, R-St. George, it was only a final vote away from passage before the legislative session ends Wednesday.
"The securities industry got to [Bramble]," Johnson said. "We continue to believe it is a defendable law and are even willing to pay for its defense. We've told the state as much."
Bramble counters that he has been assured by the U.S. Securities and Exchange Commission that it intends to crack down on naked shorting. But if the SEC does not follow through, he adds, Utah could once more target the practice.
"This way, we don't put the state at risk," Bramble said.
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