The Legislature moved on Friday to kill a bill passed in special session last spring that targeted stock trading abuse.

SB277 quickly moved through the Senate on Friday, setting the stage for actions that could get the state out of a lawsuit it likely would lose, said the bill's sponsor, Majority Leader Curt Bramble, R-Provo.

The bill passed in special session last May aimed to curb illegal "naked" short selling through fines. Short sellers borrow shares hoping the share price declines so they can return shares to brokers and pocket the difference. In naked short selling, 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 the practice can lower a company's share price by artificially creating more sellers than buyers.

Bramble said Friday that the special-session bill "was intended to get to the fraud that occurs and the damage to Utah publicly traded companies from the failure to deliver on illegal naked short selling."

But shortly after that bill's passage, the Securities Industry Association sued the state, claiming federal law prohibited states from implementing recordkeeping requirements for brokers that are different from federal requirements. The state law required brokers to quickly and regularly disclose trades that fail to settle as scheduled. The association said that, while the bill supposedly targeted naked short selling, it also affected all short selling as well as other long-term investments that do not close as scheduled.

Bramble said Friday that various lawyers and the attorney general told him the state would lose the major claim in the lawsuit.

"By bringing that bill forward in the special session, we got the attention of the Securities and Exchange Commission," he said, adding that discussions with the association and a representative of the SEC lead him to believe the SEC will address the matter of illegal naked short selling.

If it doesn't, Utah could be back with another bill next year.

"Should this bill pass and repeal the law that we enacted in the special session, they (the association) will drop their lawsuit, they'll pay their legal fees, and it will keep the state's powder dry. It will allow us to come back next session should the SEC not act aggressively in dealing with this problem," Bramble said.

The Senate vote was 27-1. The matter moved to the House.

Last year's bill was prompted by Salt Lake-based online closeout retailer Overstock.com, which has claimed it has been a target of persistent naked short selling.

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Contributing: The Associated Press; Bloomberg News

E-mail: bwallace@desnews.com