SALT LAKE CITY (HedgeWorld.com)–Utah state officials acknowledged knowing of a lawsuit seeking to invalidate the new state statute intended to address the issue of naked short-selling, but said Friday that the nominal defendant in the lawsuit, the director of the state’s securities division of its Commerce Department, hadn’t received service.

That defendant is R. Wayne Klein. He has this honor because the plaintiff, the Securities Industry Association, is asking a federal judge–the Hon. Dale Kimball–to enjoin Mr. Klein from implementing or enforcing the law when it takes effect Oct. 1.

Michael Hines, the director of enforcement for the securities division, said Friday, “Traditionally, our attorney general’s office would defend against an action like that,” but he isn’t certain in this case whether the Utah attorney general will handle the matter, or whether it will be contracted out to a private counsel.

The bill at issue, signed into law by Gov. Jon Huntsman Jr. in late May creates reporting requirements for failures to deliver contracted-for shares of the equity of Utah-based companies, and imposes a penalty of $10,000 a day on brokerage firms that fail to comply with its requirements. An issuing company falls within the coverage of the law either if Utah is its domicile or if Utah is the site of its principal place of business.

The law requires reports from any broker-dealer registered in the state of Utah. Most broker-dealers are registered in all 50 states.

The SIA, an industry group created in 1972 through the merger of the Association of Stock Exchange Firms and the Investment Bankers Association, contends that uniform national standards are necessary for rules governing settlement, record keeping, and reporting, and that the Utah law is expressly preempted by federal law.

The SIA complaint contends that because the U.S. Securities and Exchange Commission doesn’t require broker-dealers to track or report the information that forms the subject matter of the Utah law, “few if any broker-dealers have in place the systems to generate reports containing even part of that information.”

The complaint objects to the law because although it is “purportedly intended to regulate naked short-selling,” it isn’t narrowly tailored to that end. Not every settlement failure arises from a short sale, nor does every failure result from “conduct that is in any way improper or illegal.” Since tens of millions of securities transactions occur in the United States every day, the complaint says, “it would not be unusual for thousands of transactions to fail to settle within the normal settlement cycle.”

Byrne’s conference call

In a related development, Patrick Byrne, the chairman and chief executive of Overstock.com, based in Salt Lake City, hosted a conference call to discuss second quarter financial results. The results were not heartening. The company acknowledged a net loss of $15.7 million for the three months ending June 30, 2006. This is a loss of $0.78 per share. For the first half of the year, the net loss is $31.6 million, or $1.60 per share.

“We’re getting out of rehab and are ready to start walking, if not running, again,” Mr. Byrne said. But he said third quarter figures will be analogous to those of the first two quarters. He expects to “hit the ‘go fast’ button” shortly before the end of the third quarter, he said.

He spent much of the conference discussing a new plan that seems designed to make life difficult for short sellers. He said that Overstock has joined the direct registration system, which allows its shareholders to take their shares out of the customary “street name” form of ownership and register them in their own names.

Mr. Byrne said that he wasn’t recommending that stockholders adopt DRS, simply saying that if investors “want to be able to do this they should be able to do it.” He said he has heard that when stockholders try to get the paper certificates from their broker-dealer they get a lot of excuses. “The DRS takes all the slop out of that” and creates a “quick, cost efficient transfer.”

Exercising that option will make their equity unavailable for lending to short sellers. Incidentally, it will also add an extra step for anyone seeking to sell long. A stockholder using the company’s DRS system would have to transfer the shares to a broker-dealer in order to then have the broker-dealer sell them.

Mr. Byrne also provided contact information for an attorney that he suggested stockholders might call should their broker hinder their ability to establish a DRS account.

CFaille@HedgeWorld.com

Contact Bob Keane with questions or comments at bkeane@investmentadvisor.com.