This is how destan does it
This also explains the German exchanges.
Imagine that a sleazy hedge fund chooses a small, illiquid company to attack. Often that company is in a poorly understood sector, or is a company with some accounting complexities so it will be possible to create 'where there?s smoke there?s fire' skepticism about its books. Here is what happens:
__________i. The hedge fund gets that US firm listed on foreign exchanges.
__________ii. That hedge fund then 'sells' shares it neither has nor borrows.
__________iii. When the DTCC calls after three days and says, 'Where are those shares?' The hedge fund replies, 'I borrowed them on the German exchange, they will take a few weeks to show up,' or 'I am a market maker for the German Exchanges in that stock, and thus excluded from the no naked shorting rules.'
__________iv. With a nudge and a wink the DTCC says, 'OK, we?ll loan you from our own reserves of that stock.' The DTCC collects a high fee from the hedge fund to do this.
__________v. The hedge fund has relationships with a few compliant reporters, who are called and told, 'Do a hatchet job on Company XYZ.' They do so, perhaps in return for off-shore compensation.
__________vi. The combination of bad publicity coupled with the selling of an unlimited number of shares drives the stock down to the point either that the hedge fund covers and moves on, making a quick $20 - $50 million, or the company goes bankrupt, or simply remains a penny stock (in which case the hedge fund never has to cover its short, and hence, never pays taxes!)
