If I owned a Convertible Debenture which was freely convertible to stock I am not sure that I would agree that if I sold stock prior to converting that I would be naked shorting. That would seem to me to be more like the old "short vrs. the box"
I don't think it's anything like that. Admittedly, I hadn't heard of "short against the box" until reading your message. :) But it looks like short-vs-box is just a way for an investor to lock in their long gains but postpone their tax liabilities. It's a hedge of sorts, because every $1 lost by their long position is $1 gained by their short position (and vice versa). In other words, you hold one short position for each long position.
In contrast, the case with the naked-shorting CD holder isn't really a hedge. They're using their "long position" in the convertible note to murder the stock. Being long in the note doesn't counterbalance being short in the stock; it amplifies the hell out of it. Unlike with "short against the box", it's not a 1:1 short:long position ratio. It's more like X:1, where X is some indeterminately large number that can be increased by creating phantom shares.
This is insanely corrupt, imho, and is hardly a valid form of hedging. Hedging is supposed to protect against a stock decline. This hanky panky causes a stock decline. If the CD holder wanted to protect themself against UVSE's failure, they'd just initiate a legitimate short position. That way, if the company tanked, the note holder would recoup some of their losses via the stock.
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