Utah Brokerage Houses Cry Foul Over Trading Fines
SALT LAKE CITY A bill that slipped through the Utah Legislature with Gov. Jon Huntsman’s tacit endorsement sparked an angry revolt Thursday among prime Wall Street firms with Utah operations, which could face hefty state fines for trading irregularities.
“There’s blood in the water,” said Howard Headlee, president of the Utah Bankers Association, who said brokerage houses are “talking about not doing business in Utah.”
It also could be a problem for lobbyist and political operative Douglas S. Foxley, who handed lawmakers a bill written for Internet retailer Overstock.com, which complains it has been a target of persistent trading abuse. Foxley’s lobby group also represents industrial banks in Utah, some owned by large brokerage firms – clients he could lose.
Tony Taggert, an officer for Morgan Stanley – which operates an industrial bank in Utah and employs almost 5,000 with Discover Card operations here – promised a lawsuit on behalf of the Securities Industry Association if Huntsman signs the measure. The governor’s office was unaware of the growing controversy.
Headlee said the only notice Huntsman put out on the “curve ball” for brokers was a single, vague sentence buried in a proclamation calling Wednesday’s special legislative session.
“Obviously we weren’t paying that much attention. Unfortunately we are late to the table,” said Taggert, Utah’s former securities director, who now handles state regulation and litigation for Morgan Stanley from New York.
“I’m not saying we’re going to pull out of Utah, which has been perceived as very business and industry friendly,” he said. “This makes us wonder if that’s the case.”
Industry and government insiders said Fidelity Investments, Bear Stearns and Zions Bank, which operates a securities division, were among major brokers upset over the legislation and embarrassed for missing the action.
None of the three brokerages returned calls Thursday from The Associated Press. Nor did Foxley, who sidestepped questions late Wednesday, when he was at the Utah Capitol to assure passage of a bill whose sponsor, Sen. Curtis Bramble, R-Orem, says came from Foxley.
Headlee said he was at the center of bitter recriminations in a conference call of major brokers Thursday, the morning after the Legislature gave its swift approval.
The measure cracks down on a stock trading practice defended by some as necessary for orderly markets and assailed by others as easily exploited for stock manipulation.
At issue is short selling, when investors borrow stock hoping the share price declines so they can return it to brokers and pocket the difference. Overstock.com asserts it has been a target of naked short selling, where brokers send IOUs they can’t honor through a stock clearinghouse when they run out of shares to lend for short selling.
Overstock.com chief Patrick Byrne says many brokers never settle these trades, allowing short sellers to profit without having to assume risk. The practice tends to lower a company’s share price by artificially creating more sellers than buyers.
The bill approved by the Legislature fines brokers who accumulate too many unsettled trades in a given company after five trading days. The fines start at $10,000 and can increase to cover the sum total of all unsettled trades.
“This is the single best thing Utah could do to attract entrepreneurs, especially in high-tech and biotech,” said Byrne, who celebrated victory late Wednesday at the Utah Capitol by pledging to expand operations here, doubling the company’s payroll. “It helps companies that keep a significant presence in Utah.”
Brokers and the clearinghouse managed by the Depository Trust and Clearing Corp. say stock IOUs are essential to maintain market trading. They dispute that unsettled trades – called “failures-to-deliver” – are more than a tiny aberration in the market, or that all of them are short sales.
Taggert said Huntsman didn’t consult the securities industry after Overstock.com prevailed upon the governor to add the securities fines to the agenda for the special legislative session.
Michael Mower, Huntsman’s deputy chief of staff, countered that brokers never expressed opposition to a bill that almost passed during the Legislature’s January-March general session.
Mower disputed that the bill was tailored for Overstock.com, saying it could help dozens of other small Utah companies that have been or might be the target of illegal short selling.
As for threats of brokers leaving Utah, “We’re also hearing from companies that are promising to bring jobs to Utah because of this,” Mower said.
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