Here is what E-Trade says about liability of not being able to produce the shares need for a short: "If E*TRADE Securities is or subsequently becomes unable to borrow the security that I have sold short, I will be subject to a "buy-in," meaning that E*TRADE Securities may repurchase the security on the open market to cover the short position, and I will be liable for any resulting Losses."
Remember this is from the E-Trade Agreement and may not be the same as the one you signed.
Here is the whole section from the E-Trade Agreement:
(h) Sales and Short Sales
I promise to deliver all securities sold in my Account and to provide collateral of a type and amount acceptable to E*TRADE Securities for all short sales in my Account. E*TRADE Securities generally requires that a security be held in an Account prior to the acceptance of a sell order with respect to such security unless the order is specifically designated as a "short sale." If a security is not held in my Account and a sell order is processed, I must promptly deliver such securities to E*TRADE Securities for receipt in good deliverable form on or before the Settlement Date. Any order accepted without negotiable certificates or positions in the Account will be subject, at E*TRADE Securities' sole discretion, to cancellation or buy-in. To help ensure this will not occur, I agree that, unless I specifically designate the order as a "short sale," I will place sell orders only for securities owned by me and held in my E*TRADE Securities Account at the time my order is placed.
Proceeds of a sale will not be paid to me or released into my Account until E*TRADE Securities has received the securities in good deliverable form, whether from a transfer agent or from me and the settlement of the securities is complete. Instructions on how to properly endorse a certificate and deliver it to E*TRADE Securities are located on the E*TRADE Securities Web site. If the securities are not received on or before Settlement Date, or as market conditions warrant, E*TRADE Securities may in its sole discretion purchase the securities on the open market for my Account and may liquidate and close out any and all Securities and/or Other Property in my Account in order to pay for such purchase. In the event securities are bought in, I will be responsible for all resulting Losses incurred by E*TRADE Securities.
In order to prevent unintended short sales, once a sell order is placed with respect to a security position in my Account, E*TRADE Securities generally will not allow placement of another sell order with respect to that same position until the first order is either executed or confirmed to have been cancelled.
I promise that any order to sell "short" will be designated as such by me, and E*TRADE Securities will mark the order as "short" at the time the order is placed. In order to complete a short sale and maintain a short position, E*TRADE Securities must be able to borrow the security, which I do not own. If E*TRADE Securities is or subsequently becomes unable to borrow the security that I have sold short, I will be subject to a "buy-in," meaning that E*TRADE Securities may repurchase the security on the open market to cover the short position, and I will be liable for any resulting Losses. I also understand that I may execute short sales only in a Margin Account (see "Margin Account" for more information) and that such execution must comply with applicable short sales rules.
""If you are too open-minded your brains will fall out" - Unknown"