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Naked Short Selling: A “Wall Street Conspiracy”?

Posted by Larry Doyle on April 17, 2012 7:54 AM |

Do readers recall Dick Fuld, then CEO of Lehman Brothers, railing against hedge funds that were attacking the once venerable firm by aggressively shorting its stock? Fuld maintained that these aggressors were engaged in a practice known as ‘naked short selling’ and that they brought Lehman to its knees in the process.

The last four years have brought us plenty of intrigue and innuendo about a host of illegal and illicit practices on and off Wall Street, but we have heard and seen little about this practice. Why? What questions need to be addressed on this topic? 

1. How widespread was this practice?
2. Was the SEC totally ill-equipped or merely unwilling to address naked short selling?
3. Can the SEC go back and reconnect the dots to expose the practice and the practitioners? Will they?
4. Can the American public stomach the blatant assault on basic rules of capitalism?
5. Will naked short selling be another nail in the coffin of those who view Wall Street as a rigged game?
6. Might this all be about to change?

This topic clearly deserves front page coverage. I believe Wall Street, Washington, and the media controlled by both centers of power view this topic as too explosive. Let’s navigate past the front page and we see that the FT writes today, SEC Charges Broker in Short Selling Scheme:

US regulators accused optionsXpress, an online futures broker, and five individuals of engaging in sham options transactions as part of a naked short selling scheme.

In an administrative proceeding, the Securities and Exchange Commission charged optionsXpress, which is now owned by Charles Schwab, four executives and customer Jonathan Feldman, a top executive with Eastern Savings Bank, a private Maryland savings and loan operation, with violating short selling rules.

Mr Feldman is accused of trading shares of Sears and American International Group, among others, from October 2008 to March 2010 that involved billions of dollars in trades.

Under short selling rules, known as Reg SHO, an investor who sells borrowed securities is required to replace them within three days of the trade. Failing to deliver the securities violates the rule and makes it a naked short sale. The SEC has cautioned that abusive naked short selling harms the market because it creates the impression that traders believe the company’s securities will drop.

I have no confidence that the questions I pose above will be addressed in the midst of the SEC’s pursuit of this individual case. I am hopeful, though, that my questions will be advanced if a documentary on naked short selling gets the attention it deserves. What documentary is this?  Wall Street Conspiracy. Take the 3-minutes to view this clip:

I ask again, will we get the truth we deserve? We can if we demand it.

Can we promote the transparency necessary to expose what really happened and who was involved in this practice? We can if we demand it.

Were they merely individuals at selected hedge funds and small broker dealers, or were the very titans of Wall Street at Goldman Sachs, JP Morgan, and every other shop also involved in naked short selling? What do you think?

I commend Kristina Leigh Copeland for producing this documentary. Please share it so this story gets the attention it deserves and our virtues of truth, transparency, and integrity have a fighting chance against those who would abuse capitalism and America.

Larry Doyle

Please subscribe to all my work via e-mail, an RSS feed, on Twitteror Facebook.

I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Peter S.

    This isn’t capitalism – its crapitalism. Collusive fraud erodes the efficiency and integrity of our markets like no other external event. It is the enemy from within that creates the greatest danger – Et tu, Brute?

  • Ken Brodeur

    Speculation was a universal topic during the French Revolution. It was considered a major problem and overwhelming majority wanted it abolished. Speculation severely skews markets and disrupts the balance of supply and demand. Any futures contracts should be written with delivery as a requirement. Options, a derivative, should be outlawed. Corporations have managed to eliminate risk by shoving it onto the public in the form of government taxes, inflation and odious regulation of small business in favor of corporate fascism. The Corporation should be abolished or contained to townships as the founding Fathers has wished. The Federal Reserve system should be abolished along with the IRS, and all the alphabet soup agencies created since 1913.
    The Federal government should control large business by import and export tariffs, otherwise leave small business and the workers of the world alone!

    • Jeff

      Ken? Abolish futures, options, IRS, and the FED? Really? Futures clearing houses do require delivery of the physical asset; futures accounts are marked to market every day. And these contracts obligate the long to buy(receive) from the short who delivers the underlying good or the difference in cash value(at the spot price for immediate delivery) at contract expiration. The underlying forces of supply and demand are too powerful, and will ultimately drive the price into equilibrium.

      I’m not going to get into IRS or the fed comment until you take off your tinfoil hat that protects you from the Government’s mind control radio waves.

      • W Fry

        The fractional reserve system is firmly in place for all commodities. The powers that be in the current market system have sold more gold and silver than physically exists.
        There is no way to deliver all of what was sold.And tyhat is just the tip of the iceberg.

  • fred

    I do agree that the naked short issue needs to be addressed, but …

    Is naked shorting any more heinous than putting the market up when the fundamentals don’t support higher prices.

    Naked shorting ‘requires’ stock to be delivered in 3 days. Naked ‘longing’ requires no further capital committment if prices rise from the time of purchase.

    Would it be a good idea if both sides were required to commit good faith ‘regulatory capital’, (not available for leveraging) for a period of time. No QE phonie money allowed.

    Along these lines, even if you allow mark to model why couldn’t the Fed require banks to carry mark to market based reserve levels? And when the market was/is clearly overpriced why didn’t/doesn’t the Fed require banks to carry reserve levels based upon LT valuation mark to model?

  • Jeff

    poo poo Larry, lets not get behind this pseudo Michael Moore documentary attacking a faceless entities on wall street. Let us not muddy the waters with market-mechanic-inaccuracies that the “short sellers” are to blame for the market crash; or even hint to that fact which this film purports. Stick to your facts about the wall-street-Washington incest, this isn’t of any value and merely discredits the real issues that you have brought up in the past.

    • LD


      With all due respect, I fully appreciate that short selling is a core principle of a healthy capitalist system. I abhorred the fact that short selling was banned for a period of time both here in the US and in Europe.

      Here is the SEC statement: SEC Halts Short Selling of Financial Stocks to Protect Markets and Investors

      The question remains, why did the SEC make that move? Naked short selling? What is to be lost by answering my first, second, and third questions? Information is everything.

      I applaud short sellers for the value they bring to our markets. Short sellers and naked short sellers are two different animals, though, aren’t they?

  • Jeff

    Ok ok, that’s more like it. I too am irked by the fact that the papers and regulators claim “victory” when they claimed short selling banned limited losses. When it is really a stunt for the regulators to save face and say they did every thing they could to protect investors during a time of market hysteria. In an attempt of deflection by pointing the finger off stage at the evil doers who are the cause for the sell-offs. It takes away from the fundamentals that lead to the market distress.

    Company’s (like in the video) use “short sellers” in the same fashion as the regulators who imposed the short selling ban. Their CEO uses the term “naked short sellers” when illustrating the reason for the company’s poor performance; detracting from the fundamental problems of the company.

    It is the responsibility of the broker to locate the shares before acting as the intermediary between the buyer and the short seller. The larger i-banks and brokerage houses have enumerable number of shares in margin accounts of their customers so locating a borrow is not as difficult as it is fr the smaller broker; it is easier to claim that you have located it as well. The amount of turn over that occurs and the vast number of accounts held at these large broker-dealers makes it difficult/ costly for regulators to crack down on brokers who say they have located a borrow on the trade date. As long as they deliver the security within t+3 then there is no issue, then no one can tell. But when a smaller broker like options-express makes a 62% of the daily trading volume in Jan 2010, red flags should be raised.

  • Ed

    Simple solution, Larry.

    Let’s all pony up the money to buy these Wall Street firms, Sachs, Schwab, Morgan, and all the traders. Then give them (and all their executives) to Iran. We would be Free at last, and their society can crumble.

    While we are at it, let’s buy FINRA and SEC and give them away to Russia,

    If you are wanting the “ultimate solution” lets acquire George Soros and give him away to the Taliban.

    • Andrew

      I like it!

      FINRA lawyers must have attended Russian law schools already.

  • Chris

    There are a few frauds that occur with Short Selling. First the rule does not require that the shares are borrowed, only that they are located, big difference. Account holders who are short continue to pay short interest even if the shares are not actually borrowed. Then you have the possibility that there are more shares short, than have been issued. I don’t remember the exact circumstance, but about 20 years ago, a penny stock firm out on Long Island actually faced this. Instead of being allowed to call in the shorts, the SEC closed the brokerage firm, for lack of net capital related directly to more shares short than issued.

  • Larry,

    Awesome article today. Please stay on top of this story. Hoping you will research my article and write your views on this topic.


    • fred

      Interesting ‘tie in’ between the only major Naked Shorting lawsuit and the Flash Crash. Although motive will probably never be determined, most certainly major HFT participants are also among the parties mentioned in the Naked Short selling lawsuit. Taking it a step further the perps are also the majority of primary dealers in the Fed’s below market interest rate policy mechanism.

      Isn’t it time for the gov’t to stop colluding with the banksters and to start enforcing effective regulation that will target those benefiting from extreme price volitity (both higher and lower)?

  • Franz

    For shorting selling, journalist at another website have figured out the Lehman Brothers crash, illegal naked short selling scam, and the criminals that brought down the financial system.

  • Chas56789

    Larry , That was an excellent article and a most important topic that you have written about. The documentary movie “The Wall Street Conspiracy,” of which the trailer you have included in your article, is a MUST SEE movie. It will open everyone’s eyes who views it. Many hundreds of companies have been victimized by the loophole in the system and the criminals who have exploited it.

    Look at a company called Bancorp Intl symbol BCIT. A company that has over 1.2 billion shares of stock sold to shareholders held in brokerage accounts, yet Cede & Co only has 635,000 shares. The DTCC put a chill on the stock back in 2005 and shareholders cannot get their certificates for their shares. It is an amazing story and the company has recently put out some fantastic press releases that exposed that the brokers were naked shorting the stock to their own clients.

    The lid is being lifted off of Pandora’s box with this documentary movie, and a lot of fraud in the form of Naked Short selling is about to be revealed. The system is broken and needs immediate overhaul. Most importantly, the criminals who have gamed the system need to be held accountable.

    Larry this was a great informative article and please keep these articles coming on the topic of Naked Short Selling.

  • Rick Smith


    Keep up the good work but be careful you are stepping on some very large toes…In all the blatent corruption we have witnessed in the last few years this is by far the largest on-going corrurpt activity and is being protected by the SEC and the DTCC. If you notice that the petition supposedly moved the SEC to create the SHO regulation which grandfathered all prior acts of naked short selling. The reason that was important is because requiring all past sold shares but never delivered shares or owned shares by the seller would break the system 1,000’s of times over…

    One opportunity is for the aggrieved companies who issue shares to organize and by banding together in a group and demand that they be the only issuers of shares. Because in essence these naked shorters are counterfieters and are aided and abetted by the trading houses. It would be like if the states printed US dollars…

    In my mind the public is much too as sleep and dull natured to understand this problem and blogs like your’s is as far as this allowed to go in the media world as the normal news outlets are just too afraid and compliant to Wall Street to take this on. I do believe that an organization representing several hundreds or perhaps thousands of companies of listed securities needs to be first educated and then activated, insisting that their rights be preserved as the only issuers of shares. Unfortunatey this has been going on for years and years and some of Americas best hope for prosperity in the future are being raped one at a time.

    This is the only thing that hasn’t been tried, individual investors are not getting anywhere and individual companies like Overstock are always told that they’re just complaining because their stocks are going down and if they run their companies correctly that wouldn’t happen!!!

    Please keep reporting the truth.

  • fred

    Theoretically, why are shares even issued. If a company wants to go public all it has to do is open up it’s books and join an exchange.

    Brokers will take it from there. When a customer wants to go long, the broker credits their account based on normal price discovery and should be required to hedge the entire position with puts. When a customer goes short the reverse. Broker specific and potential systematic risk would only be created when the broker uses an imperfect hedge.

    Prior to naked shorting, insiders were the only ones capable of manipulating prices on any scale. Numerous hypothetical examples of insider manipulation are cited in the book Reminiscence of a Stock Operator.

    Under the ‘synthetic stock scenario’, the function of the Regulators (Fed, SEC, etc) becomes not only necessary but critical. If the broker puts on an imperfect hedge, they are assuming the entire risk of the unhedged position, if they are among the ‘too big too fails’ the taxpayer would become ultimately liable. Isn’t this what happened at AIG with credit default swaps? Why wasn’t AIG required to carry offsetting positions to their exposure or comperable cash reserves’ Where were the Regulators? if Regulators are not going to perform proper oversite, then they should ban naked shorting soas to avoid public exposure to risk either from 1) FDIC or 2) too big to fail exposure.

  • Mary Jacobs

    Naked short selling has permitted flooding the market with phantom shares,
    then closing down the trading in a stock for various specious reasons via the DTCC placing a “chill” on the stock, and the brokers then pocket not only the commissions but also the money paid for the non-existent stock, and for which they will not produce certificates of sale (which don’t exist) despite settlement.
    This has happened to me as a shareholder of Bancorp International Group,(BCIT)
    and a fellow shareholder has won a refund for what he paid for this stock in small claims court and I am about to attempt the same.

  • john

    If all shareholders were required to take possession of their shares not only would there not be any naked short selling, there wouldn’t be any short selling either because the holders of these shares, the brokerages, would not be able to engage in the deeply unethical business of renting (not lending) their clients shares to speculators determined to push down the price of these shares. What would the result be if there was no short selling?

    The proponents of short selling tell us that markets would be “illiquid, inefficient and price-discovery would be difficult to find”. Sounds like BS to me. Any attempt to suspend short selling certain stocks is often met with these sorts of cries. It seems grossly unfair that professionals are able to sell short but amateur investors and traders are restricted to going long, thereby making them very vulnerable to short attacks.

    This is akin to a second string high school rugby team playing against a professional national team that is allowed to pass the ball forward as well as backward. I think if all forms of short selling were banned there would be a lot less volatility in the markets and therein is the issue. The professionals make their money through this volatility, instilling feelings of optimism and despair by turn like a puppet master pulling strings on his puppet. So easy.

    Can you imagine them surrendering their short selling privileges without a vicious and prolonged fight? Half of Wall St and the business of many financial firms would disappear in a puff. The investment bankers would no longer be masters of the universe and small-time investors might actually be able to hang on and make some money.

  • john

    The short seller’s argument that shares that get over-priced need to be brought back down to earth is also bogus because the higher the price gets above its fair value the less affordable it becomes and the lower the future return on investment becomes. Most people understand this.

    Furthermore, sooner or later the price starts to decline anyway as insiders and investors and short and medium term traders eager to take their profits or stem a loss get nervous and sell. As more shares become available than there is demand for them the price continues to descend until an equilibrium is reached, barring positive or negative news.

    If more people recognised this they would question why short selling is permitted at all and all the useless, unproductive gamblers of other people’s money we call hedge funds that enrich a select few would cease to exist.

    • LD


      With all due respect, short selling provides a very real and valuable component to the capital markets and capitalism.

      Without short selling, the markets would be filled with even more pump and dump scams than currently exist.

  • Toxo

    International MF approved naked short selling

  • john lee

    Naked shorting happens every day on W hore Street…but how often they’e caught? 1 out of 50 times? when they are caught they only pay some penalty and start NSS again. Where is the 3 strikes law?

    SEC Ex-Chairman Christorpher Cox on naked short selling

    Naked Shorting: 11-14 Congress tells SEC to stop it now.

  • Tony Ryals

    Well Mr.Doyle,are you saying that all this time Patrick Byrne’s wasn’t just another illegal pump and dump scam that it has appeared to be and his ‘business’ would have thrived had it not been for some ‘Sith Lord’ ‘naked shorting’ it all this time ? And what about NFI or Nova Star Financial that he used to promote with his anonymous and not so anonymous gang (including possibly James Dale Davidson who started the naked short selling rumor by claiming his biotech penny stocks Genemax and Endovasc were ‘naked shorted’ in 2002) on the Yahoo NFI message board ? If dividend paying NFI shares were ‘naked shorted’as they claimed then why did everyone always receive their dividends anyway even on what would have supposedly been non-existent ‘counterfeit’ shares (until that stock ponzi scheme collapsed) ? Are you sure Overstock.con was really ‘naked shorted’ ? And how do you feel about CEOS of public companies like Patrick Byrne having their own offhore hedge funds to buy and sell their own shares among others ? Don’t you think some of that insider manipulation might not be confused with so called ‘naked short selling’ ?

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