Utah is a disgrace to free enterprise

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BWV 1080
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Utah is a disgrace to free enterprise

Post by BWV 1080 » Wed Jun 07, 2006 10:15 am

To protect the embattled Overstock.com in its battle against some investment firms shorting the stock, Utah tries to ban the practice outright:


http://www.msnbc.msn.com/id/12994553/

SALT LAKE CITY - Over the objection of Wall Street firms, Gov. Jon Huntsman signed a bill Friday that cracks down on naked short selling with state fines for brokers who accumulate too many unsettled trades in any company's shares.

The bill was written for Utah-based Internet retailer Overstock.com Inc., which complains it has been a target of a practice that traders dismiss as a tiny aberration in the markets.

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"This bill is good for business, particularly small- and mid-sized cap companies," Huntsman's deputy chief of staff, Mike Mower, said Friday.

Tony Taggart, who handles litigation for the Securities Industry Association, had promised a lawsuit if Huntsman signed the bill, saying of the threat: "It's not a risk _ it will happen."

Taggart said the measure approved by the Utah Legislature late Wednesday caught the industry by surprise. He did not immediately return calls Friday.

"We dropped the ball, all the brokerage firms," said a financial adviser for a major Wall Street firm with operations in Salt Lake City, who insisted on anonymity because he was ordered by the company not to speak about the matter to reporters.

The bill's sponsor, Sen. Curtis Bramble, R-Orem, said Overstock.com was "the poster child" for victims of trading abuse. He said the bill could help other emerging companies that can be vulnerable to short selling.

Short sellers borrow stock hoping the share price declines so they can return it to brokers and pocket the difference. Overstock.com contends 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 CEO 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.

Bramble said brokerage houses never spoke up against the bill in the months it has been languishing at the Utah Capitol. It finally passed Wednesday during a special session with little debate.

The Utah law requires brokers to regularly disclose trades that fail to settle, adding to paperwork they say is bothersome. Fines for violations start at $10,000 a day and can increase to cover the sum total of all unsettled trades.

Utah Securities Director Wayne Klein said he was prepared to start enforcing the law July 1 and was looking into allegations of abusive short selling.

Klein said his investigation would go beyond Overstock.com's complaints to the lending of shares by brokers without the knowledge of a share's owner, which is allowed under standard customer contracts at brokerage firms.

Klein said it can result in two people voting on proxy proposals or for a company's directors when only one person is the legal share owner. He said some companies adjust for the problem by "prorating" extra votes to shares, but "if that happened in an election for political office, we'd all cry foul."

Shares of Overstock.com rose 65 cents, or 3 percent, to close Friday at $22.66 on the Nasdaq Stock Market.

Ralph
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Post by Ralph » Wed Jun 07, 2006 10:23 am

Finally, a pro bono cause for Corlyss right at home.
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BWV 1080
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Post by BWV 1080 » Wed Jun 07, 2006 10:40 am

Actually I do not know how the State can override Federal securities laws

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Post by Ralph » Wed Jun 07, 2006 10:52 am

BWV 1080 wrote:Actually I do not know how the State can override Federal securities laws
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States can't override federal laws. But with regard to securities regulation there are areas of concurrent jurisdiction where the state can set its own policies as long as they don't conflict with federal law. These state securities laws are called "Blue Skies" acts.

Whether there is a conflict is often a complex question.
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Post by BWV 1080 » Wed Jun 07, 2006 11:04 am

As the law applies only to Utah, which has very little professional money management activity (Wasatch is the only firm that comes to mind) the effect of this law, even if fully enforced will be nil.

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Post by Ralph » Wed Jun 07, 2006 12:34 pm

BWV 1080 wrote:As the law applies only to Utah, which has very little professional money management activity (Wasatch is the only firm that comes to mind) the effect of this law, even if fully enforced will be nil.
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Not after Corlyss takes CMG public!
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Post by BWV 1080 » Wed Jun 07, 2006 12:42 pm

It will be good for her to know that after we start to suspect her of cooking the books, the Utah Legislature will step in and protect her

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Post by Corlyss_D » Wed Jun 07, 2006 1:41 pm

Well, you know how conservative Utah is. Maybe it was the 'naked' shortselling that bothered them. Maybe if the traders wore clothes, the law would never be enforced.

How can you 'borrow' stock? Whatever happened to 'buy low, sell high?' As you can see, I know nothing really about the stock market, and after investing my mothers' money in October 2000 (thru a financial analyst who was supposed to know what he was doing) and losing tens of thousands of dollars, I don't do stocks anyway.
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Post by Ralph » Wed Jun 07, 2006 1:47 pm

Corlyss_D wrote:Well, you know how conservative Utah is. Maybe it was the 'naked' shortselling that bothered them. Maybe if the traders wore clothes, the law would never be enforced.

How can you 'borrow' stock? Whatever happened to 'buy low, sell high?' As you can see, I know nothing really about the stock market, and after investing my mothers' money in October 2000 (thru a financial analyst who was supposed to know what he was doing) and losing tens of thousands of dollars, I don't do stocks anyway.
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Well, you do "livestock" these days, no?
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Post by BWV 1080 » Wed Jun 07, 2006 1:49 pm

Corlyss_D wrote:Well, you know how conservative Utah is. Maybe it was the 'naked' shortselling that bothered them. Maybe if the traders wore clothes, the law would never be enforced.

How can you 'borrow' stock? Whatever happened to 'buy low, sell high?' As you can see, I know nothing really about the stock market, and after investing my mothers' money in October 2000 (thru a financial analyst who was supposed to know what he was doing) and losing tens of thousands of dollars, I don't do stocks anyway.
In a short sale (naked or not) you borrow stock from the broker and sell it. You are then responsible for buying stock in the market at a later date to cover the position. So you benefit if the stock price falls. Brokers and Banks regularly lend their customers securities for these purposes. The ability to lend shares is part of most brokerage agreements, while banks need permission to do so (& usually share revenue with large clients).

The important point is that the market needs a mechanism to express a negative view on a security. This is a needed correction mechanism to speculative excess, like the 2000 Tech bubble. The Overstock CEO has waged a very public campaign to try to blame Wall Street for his own failures and has succeeded in getting the State governement to support his crusade. Can anyone imaging the Texas government going against vocal opponents of Enron in 2001? The short sellers were key in exposing the fraud there.

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Post by Corlyss_D » Wed Jun 07, 2006 1:54 pm

Ralph wrote:Well, you do "livestock" these days, no?
No. I have critters.
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Post by Ralph » Wed Jun 07, 2006 1:57 pm

Corlyss_D wrote:
Ralph wrote:Well, you do "livestock" these days, no?
No. I have critters.
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Get antibiotics before it's too late.
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