Utah delays short-sell law

Utah agreed to hold off enforcement of a new law that called for fining brokers who accumulate too many stock-delivery failures.

The agreement was made Friday with a leading Wall Street trade group, which signaled it was willing to step back from a lawsuit it filed, accusing the state of taking a power reserved for federal regulators.

The Utah law was to have taken effect Oct. 1, but will be postponed until June 1 under a preliminary injunction signed Friday by U.S. District Judge Tena Campbell.

In court papers filed Friday, both sides said the dispute could be resolved by new trading rules under review at the U.S. Securities and Exchange Commission.

In a statement, the president of the Securities Industry Association, Marc Lackritz, said his group looked forward to working with Utah regulators to address the state's concerns about market irregularities.

The Utah legislation, signed this year by Gov. Jon Huntsman Jr., was largely written for Salt Lake-based Internet retailer Overstock.com Inc., which contends it has been a target of an illegal form of short selling that brokers dismiss as a tiny aberration in the markets.

Huntsman and legislators have said the law would make Utah more attractive to other small- and mid-size companies seeking protection from predatory trading practices.

Short sellers bet on declining stock prices. They borrow shares 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 traders sell shares they haven't borrowed, using IOUs that brokers send through a stock clearinghouse. The brokers use IOUs until they can find shares to deliver, but Overstock says many of the transactions never get completed, leaving its shares vulnerable to counterfeiting.

The practice can lower a company's share price by artificially creating more sellers than buyers.

Brokers say such failures-to-deliver 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 Securities Industry Association filed its lawsuit July 28, contending federal law prohibits states from making record-keeping requirements for brokers that are different from the requirements of the Securities Exchange Act.