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Naked short selling

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A naked short sale, (or naked shorting), is the illegal form and practice of selling shares or securities short. It is considered as a device to depress stock prices.

The practice is relatively new to the capital markets. It is when Short selling takes place on a security, but instead of borrowing a share before selling it, the seller does not borrow or arrange to borrow the securities in time for settlement (in the major United States capital markets, settlement typically takes place three days after the transaction). A seller sells something that he doesn't own, and the buyer pays his money, receiving nothing in return but a brokerage statement representing an IOU for the shares ordered. As a result, the seller fails to deliver securities to the buyer when delivery is due; this is known in the securities industry as a "failure to deliver".

Controversy

Naked short selling can threaten the stability of stock prices because stocks can be sold without having to first acquire them from existing owners. In practice, true naked shorts cannot be maintained by public investors since they must either have the shares borrowed for them by their brokers in advance or promptly deliver the physical shares. Therefore, true naked shorts are typically done by broker-dealers and market makers who are able to maintain such naked short positions in secrecy via simple electronic journaling or book-keeping, intra-firm, to customers who bought and who simply need to see share figures on their statements to feel assured. Although this is illegal as the stated share ownership is bogus, it can be extremely difficult to detect, unless the buyer requests physical delivery of share certificates, which is very rare these days. Even in the rare instance such share certificate delivery is sought by the shareholder, the broker-dealer or market maker can always belatedly buy the needed shares on the open market, and deliver those.

In the United States, the Securities and Exchange Commission enacted Regulation SHO to prohibit Naked Short Selling. However, Regulation SHO makes an exception for market makers engaged in "bona fide market making". Market makers do not have to locate stock before selling short, because under certain circumstances they need to be able to provide liquidity. Regulation SHO also put in place a warning system against the risk of stock price instability by publicly identifying securities where short positions composed more than 10,000 shares and more than 0.5% of the Total Shares Outstanding for 5 consecutive settlement days or more.

Even after the enactment of Regulation SHO, naked short sales have again come under scrutiny due to the large number of stocks which have triggered the warning system.

Criticism

Critics believe that Naked short selling causes an unnatural depression in share price by artificially and bogusly boosting the supply of shares available to the market. This results in a market inefficiency, as unlimited supply meeting fixed demand equates to price depression. Illegal naked short selling is a market manipulation tactic, and is really nothing more than fraud. The product remains undelivered, but the buyer is never notified that he hasn't received his share. In fact, naked shorters will not want the buyer to know that the shares came from thin air, and the number of shares shown on the confirmation and monthly statements is pure fiction. Meantime, the naked shorter gets to use the buyers' purchase money and to earn interest on it at low risk. Since naked shorters are typically able to create virtually unlimited artificial supply to drive share prices lower and to later buy them back (cover), substantial profits are made in such operations.

Companies are adversely affected when they need to do secondary offerings of stock to fund their growth or operations, and the price is artificially low. Investors are adversely affected when their stock is depressed, and if sold, sold for an artificially low price. Naked short selling as a trading strategy has been illegal since the creation of the SEC in 1934, but is still going strong because by its very nature, and especially today with electronic book-keeping being the norm, it is extremely difficult to detect without the self-incriminating confessions from the naked short sellers themselves.

Counter criticism

In 2003, the SEC implemented a new rule to ban the practice. The ruling was mainly to protect vulnerable stocks to aggressive short-selling. However, oppononents of this rule have been arguing that "if naked-shorting had not taken place during the micro-cap crime wave of the 1990s, such stocks would have climbed even higher before they crashed".


But this argument in favor of naked short selling is specious and without merit, except to preserve the special privilege and unfair advantage of broker-dealers and market makers over the public. The truth is that most stocks move higher because the public are induced to buy more and at still higher prices as a result of "recommendations" and "upgrades" from Wall Street analysts who routinely give higher and higher price targets to fuel the speculation on stocks their firms and clients have already bought at low prices and waiting to unload. Secondly, naked shorts are typically done at or near price exhaustion, since broker-dealers and market makers are extremely shrewed at avoiding risk and almost invariably make huge profits from such operations. Thirdly, Wall Street's "downgrades" are extremely powerful and are additionally and routinely used to drive stock prices down that they have already sold short naked. Fourthly, there are better and fairer solutions such as allowing no margin purchase or margin short sale of such micro-caps, to stem speculative excesses.

See also

Prominent opponents

News articles from as far back as early 1999 up to the current time (2006) cite the following as being vocal in their opposition to Naked Shorting.

  • David Patch (Publisher)

David Patch has publicly expressed opposition to naked short selling in his letters to the SEC (an example)

  • Dr. Patrick Byrne (Chief executive of Internet retailer, Overstock.com)

Dr. Byrne's position is detailed in a series of interviews on BusinessJive.com.

External links

............................................................... Too sad the 'anti-naked short selling' fraud team has arrived at Misplaced Pages to cheer lead for David Patch who is connected to the Beltway's James Dale Davidson who created 'NAANSS' or 'National Association Against Naked Short Selling'in 2002 to divert attention away from his illegal pump and dump activities of penny stocks and Genemax and Endovasc in particular.Attorney John O'Quinn was likewise involved and defended Endovasc as a victim of 'naked short selling' when in truth millions of shares were dumped from a Charles Schwab account.Endovasc also used the Bellador Group boiler room operation of Kuala Lumpur and Dubai to unload even more of their worthless and unregistered U.S. penny stocks.All the while and even now like James Dale Davidson,swearing Endovasc was and is a victim of 'naked short selling'.Charles Schwab as well as Mantas Inc and their 'anti-money laundering' software could have exposed this fraud as a Beltway scam just as Nigerian letter scams had their origen in Nigeria.But these are white collar Washington D.C. connected frauds like David Patch who apperently feel they can commit penny stock fraud with impunity and so far they are correct.Even Mantas Inc. that should have detected the illegal 'pump and dump' activity of Endovasc from a Schwab account is a Beltway company spun off from SRA International a CIA invested company that even does IT for the GAO and the SEC !!

Securities Exchange Commission attorney Brent Baker of Utah who did not even charge James Dale Davidson and his Agora Inc.of Baltimore for their massive penny stock pump and dump operations,fraudulently blamed on 'naked shorting',is now employed by the billionaire's son Patrick Byrne of Overstock.com.Was this a reward for covering up for James Dale Davidson ?

David Patch is a known securities fraud who promotes the sleeziest of sleazy penny stocks not only through Gayle Essary's scammy Financialwire and investigatethesec.com websites but using Lycos ragingbull.com to bring in more suckers to defraud with penny stocks that run pump and dump activities and then as share price collapses as more shares are dumped cry 'naked shorting' and the SEC looks the other way.David Patch is now involved with Patrick Byrne and 'Bob O'Brien'(who will not disclose his real identity)and they use both the ragingbull.com and Yahoo to bring more suckers to their scammy websites such as the newer ncans.net.Both 'Bob O'Brien'and Patrick Byrne have funded ncans.net dedicated to claiming scammy penny stocks and near do well Nasqaq penny stocks are victims of 'naked shorting' rather than poor sells and insider dumping of shares.

To all Wikpedians I ask you remember my statements on Misplaced Pages re James Dale Davidson and his 'naked short' scam that may include using unaudited penny stock shares for money launderng.Whoever created this addition to Misplaced Pages did so for purpose of aiding and abetting penny stock fraud. So Wikpedia people be warned this is a misinformation site set up on Misplaced Pages to deceive and lend legitimacy to a fraud that Patrick Byrne is using to divert attention from his on company's failings and possible insider stock manipulation.Taser and a number of other companies who all have trouble auditing their own shares and those insiders sell or dump on trusting investors all claim they are victims of 'naked shorting'. Yet they provide no proof or documentation and are all known to use their shares like free money thus destroying shareholder value.

And Patrick Byrne and his father spent around $1,000,000 to smear Democratic VD candidate Edwards and donated to Swift Boat Captains Against John Kerry.They are as deceptive in business as they are in Overstock.com's phoney claims of being a victim of 'naked shorting' rather than little or no sells generated by Overstock.com except of its shares.

Perhaps the most important point is that no Blue Chip stock ever complains about being 'naked shorted',do they ? It has been until this last year a phenomenon only of worthless penny stock companies that all have a history of illegal 'pump and dump' activities and use every trick and the SEC's apathy to avoid declaring shares they dump or sell to offshore boiler rooms until it is too late even for an investor reading SEC filings.Now other mid level Nasdaq listed stocks are making use of the same fraudulent claim but no proof is EVER presented about who or what broker or market maker is doing the supposed 'naked shorting' nor how it could do damage to a productive company nor why it cannot be detected and the amount and source of these illusive 'naked shorts' that appear to strangely only attack worthless penny stock companies or near worthless Nasdaq or AMEX listed ones.Apparently the 'naked short sellers' avoid the Blue Chips.Why ?

Senator Bennett :Is Patrick Byrne's NCANS a Fraud ?

http://www.utah.indymedia.org/news/2005/10/11883.php

James J. Angel,Georgetown University,lap dancers and cyber fraud mafia

http://www.phillyimc.org/en/2005/11/17174.shtml

Has Texas Attorney John O'Quinn covered up stock fraud and money laundering ?

http://www.ntimc.org/newswire.php?story_id=2870&topic=capitalism

Did Utah SEC's Brent Baker cover up for National Taxpayers Union Founder ?

http://www.utah.indymedia.org/news/2005/10/11937.php

Charles Schwab and Share-Money Laundering

http://sfbay.indymedia.org/news/2005/06/1747107.php

Complaint-comment to SEC re use of 'naked shorting' claim for fraud

http://www.sec.gov/rules/other/265-23/tryals100705.htm

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