A richly ironic story is unfolding in Utah, where a powerful CEO had the legislature pass a law on his pet obsession — only to drag Utah into a costly and fruitless legal war.

When the Utah state legislature passed a law last year to fight the imaginary “naked shorting menace” — it was obvious that the Utah pols were currying favor with the state’s biggest political contributor, Overstock.com CEO Patrick Byrne.

Well, it appears that this law was not just influenced by Byrne and Overstock.com, but was actually dictated by them. The Salt Lake Tribune has a fascinating story today which shows that small investors aren’t the only ones capable of being snookered by the naked-shorting charlatans.

As I pointed out when the “baloney law” (as I call it) was originally passed, the purpose was to divert regulatory attention from real securities fraud — such as the stock-touting schemes that have found a safe haven in Utah — to provide a ready-made “baloney” excuse for companies like Overstock, whose share prices have tumbled for reasons ranging from fraud to simple incompetence.

The lawmakers belatedly realized — after the state racked up legal fees defending a slam-dunk lawsuit — that it had been sold a bill of goods, and decided to repeal the bill.

Byrne reacted as he usually does when he doesn’t get his way– by throwing a tantrum and attacking the integrity of the state legislature: “This is worse than mere betrayal,” he said. “It is selling out the state of Utah.” (An apt description of the law’s passage, not its repeal, as I point out below.)

Byrne trotted out his favorite imaginary playmate, the “unnamed national journalist,” who “told him he ’smells skunk’ in the rapid genesis” of the law’s repeal. He also engaged in schoolyard taunting and almost got into a fistfight with a lobbyist for the securities industry.

The state legislators of Utah were given a close-in look at the histrionics and paranoid drivel that is directed at anyone who crosses this perennial “worst CEO” candidate. I hope they enjoyed the exhibition, which they richly deserved.

By the way, you have to savor the hypocrisy of that “rapid genesis” line. The repeal is being carried out with glacial slowness compared to the baloney law itself, which was rushed into passage in two days, without hearings, in a mockery of the legislative process. What makes that even more unforgivable is that this law was little more than a gift to Byrne, in his effort to divert attention from his company’s flagging financials.

According to the newspaper, Utah state senate majority leader Curtis Bramble let slip that Overstock’s crack legal team had taken time out from defending an SEC investigation to ride herd over the baloney bill:

If there was betrayal, Bramble says, the finger points at Overstock.
“We relied on certain facts and legal representations [from Overstock] during the last session,” the senator said Monday. “Since we passed it, with the exception of Overstock’s counsel, every other legal [authority] has advised us we would lose.
“We also anticipated a number of other companies would support this [but] no others have come forward to say this would help them, address their problems or that the law should be enforced,” the senator added.

Gee. Don’t you think that an honest, competent state legislature would ask for some second legal opinions before the law was passed? The mind-blowing incompetence is understandable. What is a bit stunning is that Bramble fessed up to it.

Even before this dust-up, Byrne was already cranking up the baloney propaganda machine, with an item that he obviously spoon-fed to his surrogate Phil Saunders a/k/a “Bob O’Brien,” operator of the thesanitycheck.com “stock counterfeiting” website, attacking the integrity of the lobbyist who pushed for repeal. (OK, maybe this wasn’t spoon-fed to Saunders by Byrne. Maybe it came from an “unnamed national journalist.”)

When it originally passed the baloney law, Utah proved that it couldn’t care less about protecting investor interests, not when a politically powerful, free-spending CEO wants to have his way. Having realized that Utah was throwing money down the drain defending the law, it belatedly decided to put the state’s interests over Byrne.

Byrne, of course, couldn’t care less about the interests of the people of the state of Utah, any more than he does about his shareholders — or the citizens of other states where similar baloney laws are being pushed. Hopefully those lawmakers will now realize that knuckling under to naked shorting conspiracy theorists is dumb, no matter how remunerative for their campaign coffers.

© 2007 Gary Weiss. Reprinted with permission from garyweiss.blogspot.com.

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