State Being Sued Over Stock Trading Law

State Being Sued Over Stock Trading Law

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Richard Piatt ReportingThe State of Utah is being sued over the Legislature's attempt to regulate stock trading. In a recent special session, the Legislature passed a law to prevent what some call the 'manipulative and predatory' stock trading trick, 'naked short selling'.

Many companies, including Utah's, have been affected by the practice. In a nutshell, Naked Short Trading involves trading massive amounts of stock that doesn't actually exist. It can artificially change the value of stock, potentially wrecking companies. And the powerful securities and exchange industry doesn't want the state to try and regulate it.

From one of his warehouses, CEO Patrick Byrne is outspoken about the insider trading practice 'Naked Short Selling'.

Patrick Byrne, Chairman/CEO: "I think we're on the edge of the greatest financial scandal of the last 100 years. It's something that will make Enron look like a Sunday picnic."

In traditional stock trading, a buyer pays money to a seller in exchange for shares of stock. The market determines the value of that transaction. With naked short selling, there is no actual stock in the transaction. A legitimate stock's value can artificially be affected, usually sharply lowered, allowing the naked short-seller to profit.

That kind of transaction is technically illegal, and is called 'Failure to Deliver'. But critics, like Byrne, say large brokers and hedge funds do it all the time, making billions, even trillions of dollars.

Patrick Byrne, Chairman/CEO: "The stakes here are so large, and what's going to come to light about Wall Street is so ugly, that they have to try and stop this."

During this summer's special session, the Legislature passed Senate Bill 3004, an attempt to provide an additional checkpoint on the practice. But the financial industry is fighting back, through the non-profit Securities Industry Association with a lawsuit against the state, filed in Third District Court.

Among the claims in the suit, That Senate Bill 3004 is treading on Federal territory, regulation that's the exclusive province of Federal law, it says. And it claims Utah's law violates the commerce clause of the Constitution.

Byrne, as Chairman and CEO of the online 'closeout' retailer, says anyone with any involvement in the stock market--from a 401-K, to any publicly traded company--is affected.

Patrick Byrne: "I don't interpret this in terms of Overstock. I'm saying Main Street America is being destroyed. Somewhere in America there is a person eating dog food tonight so these guys on Wall Street can drive Porsches."

Two representatives of the Securities Industry Association did not return my phone calls today. We wanted to ask them, if this problem is as bad as Byrne says it is, why aren't Federal regulators doing something? Turns out no one has a clear answer to that question and why Utah passed its law.

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