In Pursuit of the Naked Short
Alexis Stokes, Texas State University
Journal of Law and Business 5/1 (Spring 2009)
This article explores the origins of naked short-selling litigation; considers
the failures of significant naked short-selling lawsuits in federal court;
surveys the obstacles erected collectively by constitutional standing requirements, the Federal Rules of Civil Procedure, the Private Securities Litigation Reform Act, brokerage firms, death spiral financiers, and the Depository Trust and Clearing Corporation; examines the efficacy of Regulation SHO, SEC rule 10b-21, and new FINRA rules; discusses recent state legislation and state court litigation; and identifies non-litigation options to curb naked short-selling. Ultimately, this article seeks to answer the question: If manipulative naked short-selling is more than a mythological scapegoat for
small cap failure, what remedies are, or should be, available?
PDF (62 Pages): Article In Pursuit of the Naked Short
Remember How Naked Short Selling Wasn’t a Big Deal?
Sanity Check via Wayback, 28 January 2009
Bernie Madoff’s brokerage owed $600 million in stock to its clients, that it, well, didn’t actually have on hand, as in the shares were either never delivered to the brokerage, or far more likely, it just, “Desked the trades” – meaning that it took the client cash, represented the securities as having been bought in the market and delivered (via the brokerage statement the client got every month), but never bothered with buying the shares.
Also known as one type of naked short selling.
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Failure to Deliver and Liability Notice Procedures
If a contract is for warrants, rights, convertible securities or other securities which (i) have been called for redemption; (ii) are due to expire by their terms; (iii) are the subject of a tender or exchange offer; or (iv) are subject to other expiring events such as a record date for the underlying security and the last day on which the securities must be delivered or surrendered (the expiration date) is the settlement date of the contract or later the receiving member may deliver a Liability Notice to the delivering member as an alternative to the close-out procedures set forth in paragraphs (a) through (g). When the parties to a contract are both participants in a registered clearing agency that has an automated service for notifying a failing party of the liability that will be attendant to a failure to deliver, the transmission of the liability notice must be accomplished through the use of said automated notification service. When the parties to a contract are not both participants in a registered clearing agency that has an automated service for notifying a failing party of the liability that will be attendant to a failure to deliver, [S]such [N]notice must be issued using written or comparable electronic media having immediate receipt capabilities no later than one business day prior to the latest time and the date of the offer or other event in order to obtain the protection provided by this Rule.