For those wondering what happens if the shorts can’t pay up—especially in a ticker like ERHC with a massive unverified short interest and a dormant but potentially explosive float—here’s the full breakdown:
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1. The Short Seller is First on the Hook
If the short seller gets blown out in a squeeze, their broker seizes posted collateral—often $2+/share for risky or illiquid stocks like ERHC. If that’s not enough:
Their brokerage account is liquidated
They face asset seizure: real estate, cash, retirement funds, even offshore holdings
If they tried to hide behind offshore trusts, courts can still break through
Example: In re Lawrence
Lawrence had millions in a Cook Islands trust
He lost a case, refused to bring the money back
Jailed for 6 years for contempt—until he repatriated the funds
Courts ruled that asset protection schemes can’t be used to defraud creditors
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2. The Executing Broker Steps In
The short seller’s brokerage is contractually liable to the clearinghouse:
Must deliver shares even if their client defaults
They either buy in or face losses
If they’re complicit in naked shorting or fail-to-deliver games? They’re on the hook and open to SEC enforcement
Example: SEC v. Michael Lauer (Lancer Group)
Massive naked shorting by a hedge fund manager
Tried to reroute funds offshore to avoid losses
SEC froze assets, trusts were dismantled
Courts sided with the SEC, and Lauer lost everything
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3. The Clearing Broker Pays Next
Brokers use clearing firms like Apex or Pershing. These entities:
Must settle the trade with the NSCC (a DTCC subsidiary)
If the broker fails, the clearing firm must fulfill the trade
Clearing firms hold capital against this risk—but catastrophic squeezes can still trigger cascading defaults
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4. The DTCC (via NSCC)
The NSCC guarantees every U.S. trade. If brokers and clearing firms default:
NSCC performs a buy-in
Losses are taken from the clearing fund, a pool funded by all member firms
If the fund is depleted, every member contributes pro rata to cover the shortfall
DTCC can then sue the defaulting firm to recover
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5. What About Canadian Shorts?
If the naked shorts were initiated through Canadian brokers:
They settle through the Canadian Depository for Securities (CDS)
But for U.S. tickers like ERHC, CDS interfaces with DTCC
If the Canadian brokerage fails to deliver, liability travels across the border
The Canadian regulator IIROC also has teeth—though rarely used for U.S. penny stocks
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6. And Long Investors Like Us?
If you hold ERHC long, your own broker isn’t liable—unless:
You’re on margin and shares were loaned out
Your broker is complicit in failures to deliver
Otherwise, you’re a beneficiary of the squeeze. You’re not in the liability chain—you’re in the payoff lane.
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More Legal Cases to Know
SEC v. Michael Berger (Manhattan Investment Fund): $400M in naked short losses. Tried to flee. Extradited. Jailed.
U.S. v. Brian Callahan: Ponzi fraud. Offshore accounts. All assets traced and seized.
SEC v. Lauer: Offshore trusts didn’t help. Assets frozen, fund dismantled.
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Liability Chain – No Escape
Party Role On the Hook?
Short Seller Initiated the trade Yes
Broker Executed trade Yes
Clearing Broker Settled trade Yes
DTCC/NSCC Guaranteed trade Yes, then recovers
CDS (if Canada) Cross-border intermediary Yes, if used
Long Investor’s Broker You No, unless complicit
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Final Word
In a thin-float, dark-pool-heavy stock like ERHC, any forced covering event—whether legal, regulatory, or operational—could send unhedged naked shorts scrambling, triggering buy-ins and margin calls all the way up the chain. No one escapes. And offshore games don’t work—courts can pierce trusts, seize property, and enforce repatriation orders.
If the DTCC or a clearing broker is forced to resolve failures, it could expose the true synthetic float, and what follows could be historic.
Krombacher
AI
