I may be missing something on this, but it sure seems like the brokers who were selling the pre-split shares were effectively shorting naked since they did not have the shares to sell and could not have borrowed them. The mistake originated either with a human error regarding the outstanding shares from either the company delivering shares without the required restriction or brokerage firms ignoring the restriction and thinking restricted shares were not restricted. There was clearly not a realization that there were only 11 outstanding shares and that the 33 million post split shares were not restricted pre split.
Regardless of how many outstanding shares there really were or are, if there were delivered shares with proper restrictions, then the brokers who sold the pre split shares had and will have the obligation to buy to cover, which may also explain the post split runup. There are and were not enough real post split shares available for them to buy to cover everything they had sold naked pre split.
I suspect that the ultimate resolution of this may be that one or more brokers go out of business and-or instead of paying off in shares, they end up paying off cash for the value of what they sold but could not deliver. The value of what they sold but could not deliver, however, may be limited to the price they were sold for. If this triggered SIPC coverage, then SIPC would almost certainly pay off for the loss rather than the loss of a gain occasioned by the error. That is, folks who still hold shares may get paid what they paid for them but no more. Those who sold their stock for a profit wil get nothing.
There was some substantial trading of this on 5-17 to 5-20 inclusive.
5-17 34,900 2.90 to 4.75
5-18 134,600 1.25 to 4.00
5-19 62,400 1.50 to 2.20
5-20 259,200 1.80 to 10.55
Total 491,100 1.25 to 10.55
Assuming that the shares all traded at the mid point of each days activity, the total value was around $2.2 million -- give or take the true deviation from the average I assumed and without excluding those who sold out for a gain or loss and did not continue to hold until 5-23.
The numbers got really silly beginning on 5-23
5-23 2,229,790,000
5-24 556,408,000
5-25 799,834,000
5-26 1,362,500,000
Total 4,948,532,000
But, these 5 billion shares represent only 1650 pre split shares, a small drop in the bucket.
This is an extreme example of the danger of naked shorting, which is effectively what it was. The stock sold pre split cannot be covered because it never existed and does not now exist. Like it or not, no one is going to get 3 million shares for every share they bought before 5-23 because those shares simply do not exist. The only way to remedy this is with cash or by reversing all transactions from 5-17 to 5-20, a monumental task, at best. If I had made money on this stock during that time interval, I would scream bloody murder at having my profits taken away and would be looking for someone to sue to recover them.
Of course, if the company delivered shares without any restrictive covenant, then the company and perhaps the individuals involved have some problems, financially, and not the brokerage(s) who effectively sold it short. Of course, if the company does not have the money to cover the financial loss, then those who hold may just be SOL.
