How are naked shorts handled part 2 One of the primary challenges in investigating naked short selling is that it can be difficult to distinguish between legal and illegal short selling. Short selling is a legitimate trading strategy that involves borrowing shares of a stock from a broker and selling them in the market, with the hope of buying them back at a lower price and returning them to the broker. Naked short selling, on the other hand, involves selling shares that the seller does not actually own or have the right to borrow.
To detect potential cases of naked short selling, the SEC uses a variety of surveillance and monitoring tools, including the Market Information Data Analytics System (MIDAS) and the Consolidated Audit Trail (CAT). These systems allow the SEC to analyze trading data and identify potential cases of abusive or manipulative trading activity, including naked short selling.
Once a potential case of naked short selling has been identified, the SEC may launch an investigation to gather evidence and determine whether a violation has occurred. This may involve reviewing trading data, interviewing witnesses, and subpoenaing documents and other evidence.
If the SEC determines that a violation has occurred, it may bring civil enforcement actions against the individuals or firms involved. These actions can result in fines, injunctions, and other penalties. In some cases, the SEC may also refer the matter to the Department of Justice for criminal prosecution.
In addition to enforcement actions, the SEC may take regulatory actions to prevent naked short selling. This can include imposing short sale restrictions on specific stocks or markets, or requiring firms to locate and deliver shares before engaging in short sales.
Overall, investigating and prosecuting naked short selling can be a complex and challenging process, but the SEC has a range of tools and techniques at its disposal to detect and deter this illegal activity.
Yes, if someone is prosecuted for naked short selling, they may be required to pay penalties and fines as part of their punishment. The amount of the penalty or fine can vary depending on the severity of the offense and other factors.
When the SEC imposes a penalty or fine on a violator, the money typically goes into a fund known as the SEC's disgorgement fund. This fund is used to compensate investors who have been harmed by the violation. In some cases, the SEC may also distribute funds to the US Treasury or other government agencies.
The SEC's disgorgement fund is one of several funds maintained by the agency to compensate investors and promote market integrity. Other funds include the Fair Fund and the Investor Protection Fund.
It's worth noting that the process of recovering losses due to illegal activities such as naked short selling can be complex and time-consuming. In some cases, investors may need to file a lawsuit or participate in a class action in order to recover their losses. The SEC's disgorgement fund is one potential source of compensation, but it may not cover all losses incurred by investors.