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Naked in South Dakota

August 17, 2008 - 12:20pm

A little-noticed ballot initiative in South Dakota is turning into a big battle being closely watched by the financial services industry, hedge funds and investors around the country.

The initiative would ban "naked short selling," the practice of selling short shares of a stock that have not been determined to exist. Typically, you're supposed to borrow a stock -- and determine it can be borrowed -- before you sell it short.

Naked short selling is supposed to be illegal, but loopholes allow it to happen. An SEC ban on such short selling in several companies expired this week. The financial industry is up in arms about the South Dakota ban, which has no exceptions.

It's another populist blast from South Dakota, the first state to adopt direct democracy (in 1898). The sponsor of the measure is a Republican state senator who says he wants to protect businesses from being forced into bankrupcy by the practice. "We're just doing the job [the SEC] should be doing," he tells Markets Media Online.

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