Suit seeks to block Utah rules on brokers

The Securities Industry Association filed a lawsuit Friday aimed at overturning Utah legislation that calls for fining brokers who accumulate too many unsettled trades in a company's shares.

The association, which represents more than 600 broker-dealer firms, argued that Utah was taking a power reserved for the Securities and Exchange Commission. The suit asks for a temporary injunction to stop the law from taking effect Oct. 1.

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

Gov. Jon Huntsman Jr. said the law would make Utah more attractive to other small-size and midsize companies that he and others say are vulnerable to predatory trading practices.

"We stand by our law and feel it addresses a real issue," Huntsman's deputy chief of staff, Mike Mower, said Friday.

SIA President Marc Lackritz said federal law expressly prohibits states from making record-keeping requirements for brokers that are different from the requirements of the Securities Exchange Act.

"If each state is granted the authority to set its own rules, the resulting labyrinth of regulation would choke our financial markets," Lackritz said.

The Utah law requires brokers — many affiliated with prime Wall Street firms — to alert state regulators when they accumulate too many stock trades in a company that "fail to deliver." This means a stock certificate didn't change hands and a broker, instead, sent an IOU through a stock clearinghouse.

Brokers said such failures can occur for a number of technical reasons, but the problem resolves itself in time and represents only a tiny fraction of trading on any given day. The Utah law was aimed at an illegal form of short selling that critics say has some brokers abusing their IOU privileges.

Short sellers can borrow stock hoping the share price declines so they can return it to brokers and pocket the difference. Overstock complains it has been a target of persistent "naked" short selling, where brokers send IOUs they know they can't honor through a stock clearinghouse when they run out of shares to lend for short selling. The practice tends to lower a company's share price by artificially creating more sellers than buyers.

Also on Friday, Overstock.com released its quarterly financial figures for the second quarter. The company reported a net loss of $15.7 million, or 78 cents a share, compared with $1.9 million, or 10 cents, for the same quarter last year. Sales totaled $160 million, up 6.2 percent from a year ago.

The company's stock rose 45 cents Friday to close at $17.87. During the past year, the price has ranged from $17.31 to $48.65.