Geobio Energy (fka GBOE)

[XenaLives]

Why are some accounts locked?

Perhaps this is the reason:

Interestingly, the ability to sell a stock and then FTD
is completely legal for a certain type of investors: market
makers (including broker-dealers registered as market
makers). According to SEC Rule 203(b)(2)(iii), market
makers do not have to deliver shares on short sales for
“bona-fide market making activities in the security for
which this exception is claimed.” And who determines
what are “bona-fide market making activities”? It is left
to the discretion of the market maker, who may find it
necessary to short the security for liquidity or market
stabilization reasons or perhaps other uncertain reasons.
There have been no mentions in the literature that we
have found of market makers having to defend their use
of this exemption.

Other unique characteristics of this exemption for
the market makers are that there are no borrowing or
transaction costs. Not having to borrow or actually go
out in the market and buy the security, as well as not
having to pay the bid-ask spread, effectively eliminates
some of the greatest constraints for short selling. In
addition, the market makers have no margin requirement,
are not subject to Reg T, and are not required
to post collateral. They have full use of the proceeds—
immediately—to “hedge” the transaction.

This raises the question of what then happens to
the buyer’s account, with the buyer having unknowingly
purchased these naked short shares. He doesn’t receive
any security, either bought or borrowed, so what does
he receive? In this case, the brokers will place a marker
or a pledge to deliver the shares, which are made by
the seller’s clearing firm. To the buyer, he is unaware
this has occurred. On his statement, it appears as if the
securities were acquired and made “good delivery.” The
buyer is oblivious to the fact that there are no shares in
his account. He sees the debit in his account and has a
statement ref lecting the securities purchase. There is
absolutely no way for the purchaser to know or determine
if he has a real share or a marker.

http://www.csb.uncw.edu/people/moffettc/Research%20Papers/IIJ-JOT-BROOKS.pdf

I would like to know how the brokers can justify keeping clients' accounts locked because they don't want to buy shares.