Post by
RetailRube on Oct 29, 2018 4:41pm
Naked Shorting
There are 692,000 shares shorted as at mid-October. (Thanks, Mike49). This has climbed steadily through the year. And these are only the shorts for sellers who borrowed the shares to sell. It does not include the "Naked Shorts".
Retail investors cannot sell the shares short without borrowing them first. Your broker would not permit you to sell something that wasn't already in your account. However, during the financial crisis when some financial firms went bankrupt, some were caught doing naked shorting, If you have direct market access, you can do this.
When companies issue shares through a prospectus, there is often a clause in the prospectus that discloses the issuing broker is authorized to engage in "Market Stabilization". This means the issuing broker can sell the shares short to prevent the price going up until the share issue is fully placed. They also buy the shares to prevent them from dropping much below the offer price. At issue date when the shares are actually distributed to the buyers, the broker uses the "Overallotment" granted to them contractually to cover their naked short sales. That is legal.
I suspect there will be some holders of the Debentures who will sell the shares short without borrowing them. They would argue to the judge that they had a reasonable expectation they would receive the shares in future when the debentures were redeemed for common shares. Therefore, they were not really doing naked shorting in the traditional sense. Therefore it is legal.
There firms are gambling that the judge will agree with them. That is no sure thing.
But the naked short-sellers will get away with it if Stuart Olson management fails to turn the bright lights of an investigation on this question. If nobody says anything, it will never come before a judge for a decision on whether a mere possibility of receiving the shares in future is strong enough to comply with the prohibition on naked short selling.
This is real money, people. It is coming out of the pockets of today's common shareholders. Say something. Make a noise!