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What is Naked Short Selling

Abusive Naked Short Selling

Abusive naked short selling refers to the practice of selling securities without first ensuring that the necessary shares are available for delivery. This can be done through various means, such as failing to deliver shares within the required time frame or using fraudulent means to create the appearance of shares being available for delivery.

Why is Abusive Naked Short Selling Illegal?

This practice can be damaging to the market and to individual investors. It can cause stock prices to plummet, leading to significant financial losses for those holding the affected securities. It can also undermine investor confidence in the market, leading to a decrease in overall trading activity.

As a result, regulators have put in place measures to combat abusive naked short selling. These include requiring brokers to disclose information about their short positions, and imposing penalties on those who engage in this practice.

However, despite these measures, abusive naked short selling continues to occur. In these cases, it is important for individuals with knowledge of this activity to come forward and report it to the relevant authorities.

Famous Cases Involving Naked Short Selling

  1. Overstock.com in 2005, where the company accused several hedge funds of engaging in illegal naked short selling practices.
  2. Lehman Brothers in 2008, where the investment bank was accused of using naked short selling to manipulate its stock price.
  3. Bear Stearns in 2007, where the investment bank was accused of engaging in naked short selling to manipulate its stock price.
  4. Valeant Pharmaceuticals in 2015, where the company was accused of engaging in naked short selling to manipulate its stock price.
  5. United Kingdom’s Financial Services Authority (FSA) in 2010, where the regulator was accused of failing to adequately regulate and enforce rules against naked short selling.

Reporting Naked Short Selling

One way to do this is through the use of a whistleblower program.

Many regulatory agencies, such as the Securities and Exchange Commission (SEC), have established whistleblower programs to encourage individuals to report illegal activity. These programs often offer financial rewards to individuals who provide information that leads to the successful enforcement of a regulatory action.

The SEC offers awards to individuals who provide original information that leads to a successful enforcement action resulting in monetary sanctions of over $1 million. The maximum award amount is 30% of the collected proceeds.

To report abusive naked short selling through a whistleblower program, an individual must have specific, non-public information about the illegal activity. This information should be provided to the relevant agency in a written submission, along with any supporting documentation.

It is important to note that whistleblower programs provide protections to individuals who report illegal activity. These protections can include confidentiality and immunity from retaliation.

By coming forward and reporting abusive naked short selling, individuals can play a crucial role in protecting the integrity of the market and ensuring that individuals who engage in this illegal activity are held accountable.

Submitting a Tip, Complaint or Referral

A whistleblower should hire an attorney to report abusive naked short selling to the SEC for several reasons.

An attorney can:

  1. Provide legal guidance and advice on the best way to report the misconduct and protect the whistleblower’s rights.
  2. Assist with the preparation and submission of the report to the SEC, ensuring that all necessary information is included and presented in a clear and compelling manner.
  3. Help the whistleblower navigate the SEC’s whistleblower program, including any potential legal challenges or retaliation from the accused parties.
  4. Provide ongoing legal representation and support throughout the investigation and any subsequent legal action.

If you choose to report your your concerns without an attorney, follow these steps:

  1. Go to the SEC’s website (https://www.sec.gov/) and click on the “Report a Tip, Complaint or Referral” button.
  2. In the “Report a Tip, Complaint or Referral” form, select “Complaint” in the “Type of Complaint” dropdown menu and “Abusive Naked Short Selling” in the “Subject” dropdown menu.
  3. Fill out the form with your personal and contact information, as well as details about the abusive naked short selling you are reporting.
  4. Submit the form by clicking on the “Submit” button.

You can also report abusive naked short selling to the SEC by calling the SEC’s Office of Investor Education and Advocacy at (800) 732-0330 or by sending an email to help@sec.gov.

Frequently Asked Questions

Naked short selling is a type of securities fraud that involves selling a stock without first borrowing the shares or ensuring that the shares can be borrowed. This is done in the hopes that the price of the stock will fall, allowing the seller to buy back the shares at a lower price and profit from the difference.

To carry out naked short selling, the seller will typically sell the stock using a so-called “fails-to-deliver” trade. This means that the seller is promising to deliver the shares at a later date, but in reality, they do not have the shares to deliver.

If the price of the stock falls as expected, the seller can then buy back the shares at a lower price and profit from the difference. However, if the price of the stock goes up, the seller may not be able to buy back the shares at all, resulting in a loss.

Naked short selling is illegal in many countries and is considered to be a form of market manipulation. It can also lead to a lack of liquidity in the market, as well as damage to the reputation of the company whose shares are being sold.

Naked short selling is banned in several countries, including:

  1. United States
  2. Canada
  3. United Kingdom
  4. Australia
  5. Hong Kong
  6. Singapore
  7. Germany
  8. France
  9. Italy
  10. Spain
  11. Belgium
  12. Netherlands
  13. Denmark
  14. Switzerland
  15. Austria
  16. Norway
  17. Sweden
  18. Finland
  19. Ireland
  20. China

Naked short selling is illegal because it involves the selling of securities that the seller does not actually own or have borrowed, which can result in a lack of sufficient supply of the securities in the market and potentially lead to a decline in the price of the securities. This can be harmful to both the issuer of the securities and investors who hold the securities.

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