Wall Street group sues Utah over short-sales rule
Fri Jul 28, 2006 6:23 PM ET
By Kevin Drawbaugh
WASHINGTON, July 28 (Reuters) - The Securities Industry Association (SIA), which represents Wall Street interests, said on Friday it filed a lawsuit in federal court seeking to block a Utah law aimed at curbing naked short selling, a controversial investment strategy.
The association said the Utah legislation illegally usurps the jurisdiction of the Securities and Exchange Commission and is expressly preempted by federal securities law.
"On this issue, federal law could not be more explicit: the states are expressly prohibited from establishing ... requirements that are different from the requirements of the Securities Exchange Act," said SIA President Marc Lackritz.
At issue is a law adopted by Utah in May targeting an investment practice that has been attacked repeatedly over the years by Patrick Byrne, chief executive of Overstock.com Inc. <OSTK.O>, an online retailer based in Salt Lake City.
Short sellers borrow shares they view as overvalued from a brokerage, then sell them and wait for the market price to decline. If it does, then the short seller buys the shares back, returns them to the brokerage and pockets a profit on the difference between the sale and the repurchase prices.
Short selling is legal and common, especially among hedge funds, the lightly regulated and fast-growing capital pools that are playing an increasingly powerful role on Wall Street.
Naked short sellers take short positions in a stock without ever arranging to borrow the shares to cover their initial sales.
Earlier this month, the SEC voted 5-0 to propose a crackdown on naked shorting that would reduce the number of short positions that can be open without borrowed shares being delivered and narrow a related exception for market makers.
Utah acted alone on this issue two months ago when it adopted a law requiring brokerages to inform state regulators when sold shares are not delivered to the purchaser. Such "failures to deliver" sometimes signal naked shorting.
Brokerages that do not comply with the reporting law must pay $10,000 a day to Utah-domiciled companies whose shares are involved. The law is scheduled to take effect on Oct. 1.
The SIA filed its lawsuit in U.S. District Court for the District of Utah, Central Division. The group contends that the Utah law is too broad and covers transactions unrelated to shorting. Wall Street firms have said before that failures to deliver after a sale sometimes have nothing to do with shorts.
The SIA said, "In some cases the systems required to locate and report the information are simply unavailable."
Asked whether the SEC might file a brief with the court, commission spokesman John Nester said, "Staff is reviewing whether to recommend filing a friend of the court brief, but no decisions have been made."
A spokeswoman for the Utah Division of Securities declined to comment. |
