CMKM Diamonds Inc. (fka CMKX)

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Naked Shorting

What does it mean?
The illegal practice of short selling shares that have not been affirmatively determined to exist.

Investopedia Says.....
Remember, a short sale involves the sale of stock that belongs to someone else. So, a naked short sale occurs when an investor sells stock without knowing for sure that it can be borrowed. In the U.S., before you can short sell a security, you must affirmatively determine that you can borrow the stock. Keep in mind that the details of this regulatory principle will vary across different jurisdictions.
http://www.investopedia.com/terms/n/nakedshorting.asp

The fuss is over naked shorting, a practice that's been around for decades and that is sometimes legal. Normal short-selling involves borrowing real certificates for stock, selling the stock, buying new shares at a later date, and using the new certificates to replace the ones borrowed. Naked short-selling differs in that no real certificates change hands. Instead, the short-seller creates a paper entry showing that it owes shares to the stock buyer and will get around to delivering them later.


Naked short-selling is legal if done by a marketmaker in a temporary arrangement; it's normal for a marketmaker to be net short for a day or two and then close out the position by buying real shares later. Naked shorting can be illegal if done with the conscious intention of leaving the short position as a paper entry indefinitely.


It's often hard to tell the legal variety of shorting from the illegal. Nowadays most stock available for trading is held in book-entry form, and thus takes the form of electronic blips on the books of a stock-clearing company. Depository Trust &Clearing Corp.'s subsidiary is one of the leaders in the clearing business. In the normal course of business DTCC tolerates so-called failed-to-deliver entries of shares offered for sale by, say, brokers. This means the seller doesn't have the certificates on hand but promises to be good for them eventually. Is the clearing firm too tolerant of failed-to-delivers, thereby facilitating illegal naked shorting by brokers (or their customers)? That's the allegation in the lawsuits.


O'Quinn and his top lawyer on these cases, James W. Christian, senior partner with Houston-based Christian, Smith & Jewell, claim that over the last three years billions of uncovered naked shares were sold; that marketmakers (and/or their clients) took profits after waiting for share prices to fall before buying in--if at all; and that brokerages allowed fictitious shares to be traded two, three and four times over, in possible violation of Securities & Exchange Commission rules. Defendants deny the charges and have tried to dismiss some of the cases.


"It's the perfect murder," says O'Quinn, who is quick to smell collusion. "We've got a situation where the cop can't arrest the suspect because it causes too many problems for the police department."


But in this case the police seem to be getting involved. Last February the SEC levied a $1 million civil penalty against Rhino Advisors, a small New York City investment house, and its president, Thomas Badian, for using offshore accounts to short the stock of Sedona Corp., a King of Prussia, Pa. software maker and an O'Quinn client. (Rhino and Badian didn't admit or deny any wrongdoing.) Just last month Louisiana's attorney general issued a subpoena on behalf of that state's Sedona shareholders against UBS PaineWebber. (He's seeking information on failed stock deliveries, among other things.) In a separate civil suit Sedona wants a hefty $2 billion in damages against 17 defendants, including Credit Suisse FirstBoston's Pershing clearing unit and Westminster Securities, alleging their naked shorting knocked Sedona's share price so low that several big vendors shied away from doing business with it. New York's Attorney General, Eliot Spitzer, is interested in the case.
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