US court blocks Utah's curb on naked short selling
NEW YORK, Aug 11 (Reuters) - A federal court judge on Friday temporarily blocked a Utah law aimed at curbing a controversial investment practice known as naked short selling, in a move welcomed by Wall Street broker dealers.
The Securities Industry Association (SIA) and Utah's Securities Division agreed to a preliminary court injunction that blocks Utah's "fail to deliver" law, which was enacted in May and was to take effect Oct. 1.
The injunction, signed by Judge Tena Campbell of U.S. District Court in Salt Lake City, expires next June.
SIA officials applauded the ruling. Utah's Securities Division was not immediately available to comment.
In a short sale, investors borrow shares from a brokerage, sell them and then wait for the price to fall. If it does, the short seller buys the shares back and returns them to the broker at a profit.
Naked short sellers take short positions in a stock without arranging to borrow shares needed to cover the initial sales.
Utah in May took aim at naked short selling, which has been attacked over the years by Patrick Byrne, chief executive of Overstock.com Inc. (OSTK.O: Quote, Profile, Research), a Salt Lake City-based online retailer.
Utah's law required brokerages to notify the state whenever a short-seller does not deliver securities in transactions involving Utah companies. Brokerages that do not comply with the reporting law must pay $10,000 a day to Utah-domiciled companies whose shares are involved.
The SIA on July 28 filed a lawsuit to block the Utah law. SIA spokesman Travis Larson said Wall Street doesn't want individual states imposing laws on nationwide markets.
"If each state were granted authority to set its own rules over national markets, the resulting labyrinth of regulations would choke our financial system," he said.
Earlier this month, the SEC voted to propose a crackdown on naked shorting that would reduce the number of short positions that can be open without borrowed shares being delivered.
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