Is Naked Shorting Shorting Investors?
Wednesday, November 30, 2005
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JEFF YASTINE: Most investors have never heard of naked short-selling, a practice where traders short stocks they don`t own and haven`t actually borrowed. Some corporate executives and investors argue naked shorting manipulates stock prices; others consider it a technical trading issue. As Darren Gersh reports, regulators are trying to figure out why some shareholders are complaining they`re losing money to naked shorting.
DARREN GERSH, NIGHTLY BUSINESS REPORT CORRESPONDENT: Every day, one out of four shares sold on Wall Street is sold short. That means the seller borrows the shares and then sells them. It is essentially a bet a stock`s price will fall. The problem is some of those trades come up short. On Wall Street, it`s called a naked short.
JAMES ANGEL, ASSOCIATE PROFESSOR OF FINANCE, GEORGETOWN UNIVERSITY: They sell the shares. They don`t borrow the shares and they don`t deliver them. That`s what naked short-selling is.
GERSH: In most cases, naked short-selling violates SEC rules. One study suggests that naked shorts are also concentrated in some name-brand stocks like Krispy Kreme donuts, Tivo and American Airlines. One reason may be market manipulation or it may be that brokers are trying to help out some of their big customers.
ROBERT SHAPIRO, CHAIRMAN, SONECON: Very large customers, principally hedge funds, are being permitted to short-sell stocks without ever delivering the shares and without ever having to borrow the shares.
GERSH: The CEO of overstock.com says his company has been a victim of naked short-selling, but other small companies are hurt, too.
PATRICK BYRNE, CEO, OVERSTOCK.COM: The hedge funds can do it -- destroy the value of the stock, reduce a company to a penny stock and in the process make money. The problem is the company gets left for dead.
GERSH: Prompted by some investor complaints, the association representing state securities regulators brought together experts to discuss the issue in Washington. Many analysts say short-selling can help the markets price stocks more accurately and it`s not clear whether naked shorting is simply another front in the war between corporate management and the shorts.
ANGEL: You have a number of investors out there who are complaining that this stock has been manipulated and we need better disclosure. We need better information so that investors can find out for themselves whether it is a problem or not.
GERSH: An SEC official says the commission is watching out for signs of naked short-selling but will base any action on hard evidence collected from its regular inspections of brokers-dealers. Darren Gersh, NIGHTLY BUSINESS REPORT, Washington.
