Anatomy of the FLD

[loanranger]

"Although some short squeezes may occur naturally in the market, a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal."

This statement appears as a footnote in the 2007 amendment to REGSHO in a section addressing the concerns about short squeezes in stocks coming off the threshold list.
On the SEC page entitled Division of Market Regulation: Key Points About Regulation SHO the statement is followed by "To date, there has been little evidence of rapid and unusual upward price movement in threshold stocks."
I could use some help in finding the regulations covering "a scheme to manipulate the......availability of stock in order to cause a short squeeze". I couldn't. Of course, finding rules and cases of manipulating price in either direction is relatively easy.

A Devil's Advocate's question:
The investment club at the old folks home has been kicking around the idea of investing in a microcap company that makes adult diapers out of recycled copies of the National Enquirer. They've done a little in-house testing and agree that the product is effective.
Mark Costa Rican, an extremely wealthy entrepreneur, sees it differently. It's his feeling that the company is destined for failure based on problems in the supply pipeline in terms of the adequacy of discarded National Enquirers relative to leaky old pipes. So he shorts the crap out of it.
But the old folks like the company's prospects. And rather than sharing Mark's concerns, they feel that the shares that he is short represent shares that he will have to buy back some day, which naturally would exert some upward pressure on the stock. In fact, they start to think that increasing their own buying will exert more upward pressure on the stock and hey, there's only so much stock available to buy, right? And if they are right about the SuperSoakers, eventually Mark will want out from under that big old short position that is starting to run away from him. So they buy as individuals, they buy with club funds and they get their grandchildren to invest that college money they weren't going to need anyway.....based on the fundamentals and the dwindling number of available shares. They know that they're going to have to get out at some point, but have great confidence in the prospects of their waste management business model.

How does this fit the example?
"Although some short squeezes may occur naturally in the market, a scheme to manipulate the price or availability of stock in order to cause a short squeeze is illegal."
Isn't it perfectly reasonable to use the awareness of a short position as a consideration when investing? At what point does sharing that awareness and its potential value with others become illegal? Isn't it a simple fact that the willingness of investors to continue to buy, and not sell, shares inevitably reduces the number of shares available to others to buy....aka, the float?


ps. The thought provoking David Patch has an interesting, though perhaps less colorful, example of market manipulation of his own, circa 2008:
http://www.investigatethesec.com/drupal-5.5/?q=node/232