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Thread: a very 'dangerous' precedent just set re 'naked shorting'

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    Default a very 'dangerous' precedent just set re 'naked shorting'

    (snip)"Court Gives Overstock.com the Okay to Proceed and Denies Prime Brokerages Attempts to Derail Exposure

    Nasdaq: OSTK) () announced today a favorable ruling in the lawsuit pending in the Superior Court of California, County of San Francisco against most of the largest prime brokerage firms in the country, including Morgan Stanley & Co. Incorporated, Goldman Sachs & Co., Bear Stearns Companies, Inc., Bank of America Securities LLC, Bank of New York, Citigroup Inc., Credit Suisse (USA) Inc., Deutsche Bank Securities, Inc., Merrill Lynch,Pierce, Fenner & Smith, Inc., and UBS Financial Services, Inc.

    On July 17, 2007, Judge John Munter of the California Superior Court for the City and County of San Francisco ruled that Overstock and it co-plaintiffs have stated viable claims for market manipulation under California securities law, for common law claims for conversion and trespass to chattels, as well as for injunctive relief under California's Unfair Business Practices Act against the defendant prime brokerage firms based on those defendants allegedly executing naked short sales of the stock of Overstock with the intent of manipulating the market price for the shares of those companies' stocks. In addition, the Court granted Overstock (and its co-plaintiffs) leave to amend other of their claims for restitution under the Unfair Business Practices Act and for the common law claim of interference with advantage, to more specifically plead the factual basis of these claims…"(snip)


    For anybody that is unfamiliar, 'naked shorting' is a supposedly illegal stock trading technique where big money movers go into the stock market and 'sell' shares of stock that they don't actually own. Of course the buyers don't know that the sellers are unable to deliver on the stock shares they just bought. The sale of these non-existant extra shares pushes down the stock price. At that point the big money movers go into the market after the fact and start buying shares at the lower price to 'cover' their previous sale of non-existant shares, which they are then able to deliver. The conspiracy theory crowd is of the opinion that 'naked shorting' has been used extensively to force down the stock price of companies prior to takeovers / buyouts ... and has also arguably been used extensively in the commodities markets to depress the price of gold and silver. See

    So far very little has taken place at the federal level to seriously investigate and prosecute 'naked shorting' activities. It now appears that state courts can be successfully used for this purpose !

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    Default Re: a very 'dangerous' precedent just set re 'naked shorting'

    Naked shorting itself is not illegal, but often times its used to lever scams like pump and dump. It a very risky position to take, if you are betting on something going down just buy some out of the money naked puts.

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    Default Re: a very 'dangerous' precedent just set re 'naked shorting'

    ^^^ ahem ...

    (snip)Naked Shorting

    "The illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. However, some professional investors and hedge funds take advantage of loopholes in the rules to sell
    [nonexistant - sic] shares without making any attempt to borrow the stock [shares first - sic].

    Investopedia Says... On Oct 29, 2003, the SEC implemented a new rule to ban naked shorting in order to protect thinly traded stocks that are vulnerable to aggressive short-selling which would cause the stock price to fall. "(snip)

    from


    Naked Shorting is illegal ... primarily because it is analogous to 'countefeiting' of stock shares. The only reason that the practice wasn't illegal before 2003 was because the 'big cats' who used naked shorting always 'replaced' their 'counterfeit' shares with real shares after the sale of their 'counterfeit' shares had achieved their intended purpose of driving down the value of the stock.

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    Default Re: a very 'dangerous' precedent just set re 'naked shorting'

    What makes it 'dangerous'? I read an article about it and I thought they were prosecuting the defendants.

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    Default Re: a very 'dangerous' precedent just set re 'naked shorting'

    You seem nice enough, and I don't want to get into a pissing match with you either. I found the following on the SEC's website....


    Naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules. Indeed, in certain circumstances, naked short selling contributes to market liquidity. For example, broker-dealers that make a market in a security4 generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers. Thus, market makers must sell a security to a buyer even when there are temporary shortages of that security available in the market. This may occur, for example, if there is a sudden surge in buying interest in that security, or if few investors are selling the security at that time. Because it may take a market maker considerable time to purchase or arrange to borrow the security, a market maker engaged in bona fide market making, particularly in a fast-moving market, may need to sell the security short without having arranged to borrow shares. This is especially true for market makers in thinly traded, illiquid stocks such as securities quoted on the OTC Bulletin Board,5 as there may be few shares available to purchase or borrow at a given time.




    I think, much like in may other cases of law, 'intent' plays a determining factor whether or not a law was broken.

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    Default Re: a very 'dangerous' precedent just set re 'naked shorting'

    I don' t look forward to any new pissing matches either ... however, you left out this snippet from the SEC link ...

    (snip)"Although the vast majority of short sales are legal, abusive short sale practices are illegal. For example, it is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others. Thus, short sales effected to manipulate the price of a stock are prohibited."(snip)

    There is no other way to interpret organized high volume naked short sales by speculators which have been specifically 'engineered' to trigger additional stop loss program trades, thus causing an 'avalanche' effect on the share price due to those additional programmed sales of actual shares taking place.

    the latter is exactly what is alleged to have taken place in regard to overstock.com shares, as well as to the stock of countless other companies, to various commodities (most notably gold) ...

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    Default Re: a very 'dangerous' precedent just set re 'naked shorting'

    Sorry.. we just crossed up on points. I was only trying to say not ALL naked shorting was illegal.

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