Overstock CEO Patrick M. Byrne is pleased presidential candidates are talking about halting abusive practices associated with betting against a company's stock, a practice implicated as contributing, as Byrne predicted, to the nation's financial crisis. But the outspoken critic on naked short selling has doubts about corrective action.

"I think it's great both Barack Obama and (John) McCain are saying this," Byrne told about 50 people at the Alta Club Tuesday night. "I don't know if either will do it."

In the free public event, sponsored by Wasatch Journal Magazine, Byrne highlighted abuses he says have allowed billions of dollars to be illegally siphoned out of the market, ultimately hurting everyday Americans. Byrne will speak again on Thursday at the University of Utah.

Short selling is where traders sell borrowed stock on the premise the price will fall, and when it does, buy back the shares, return the loan, and pocket the proceeds.

"It's legal, and helps markets function more efficiently," Keith Woodwell, director of the Utah Division of Securities, said in an interview. "But the problem has been allegedly some financial institutions (that are) not in trouble being targeted by a short-selling campaign" that drives down stock prices.

Naked short selling is where traders sell stock they haven't actually borrowed. Critics say it's more prone to abuse, and whether it's legal depends on the tactic, Woodwell said.

Byrne said abuse is rampant, with traders peddling shares that don't actually exist to turn a quick buck. The practice has aided in the demise of big companies like Lehman Brothers, knocking the system off kilter. The illegal practice essentially floods the market, creates an oversupply that drives down demand and therefore prices, and ultimately takes out businesses.

He said the illegal tactic is ignored by lax regulators and business reporters who are too cozy with Wall Street. He says those who speak out are ridiculed.

Utah lawmakers tried unsuccessfully to ban naked short selling, but the law was deemed unconstitutional, Woodwell said. Regulation largely remains with the federal Securities and Exchange Commission.

As the nation's financial crisis deepened earlier this month, however, the SEC temporarily banned short selling of more than 800 stocks of financial companies and those tied to credit markets as a way to shore up confidence.

Naked short selling of 19 financial companies, including Fannie Mae and Freddie Mac, was temporarily banned in July. The SEC this month further restricted but did not ban the practice.

In 2005, Overstock sued Gradient Analytics Inc., alleging it issued negative research reports on Overstock in exchange for payments from a hedge fund seeking to profit from a drop in stock price. The SEC investigated those and others' short-selling conspiracy allegations, but terminated the probe without recommending action.

If you go

Overstock CEO Patrick Byrne is scheduled to discuss systematic failures in the financial system Thursday at the University of Utah. The event, which spotlights illegal practices of naked short selling of company stock, is scheduled for noon in the Olpin Union Building's Saltair Room. It is free and open to the public.

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