wadirum, picked this up from the SEC's website...
Even though naked shorting is legal, there is one big exception to this rule. Judging by what has happened to SPNG over the past year, would you say the MM's have deliberately manipulated the share price? I say yes. If so (notice the second, 3rd paragraph):
II. "Naked" Short Sales
(3rd Paragraph):
Naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules9/b0. 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.
Is all naked short selling abusive or illegal?
(3rd Paragraph from a different section):
Selling stock short and failing to deliver shares at the time of settlement with the purpose of driving down the security's price. This manipulative activity, in general, would violate various securities laws, including Rule 10b-5 under the Exchange Act. Regulation SHO does not address this issue.
AI
