Yeah, but when you can't settle and you bounce it onto the next guy and the next guy and oops - the guy in the Caymans who doesn't report, it all gets lost in the shufffle.
That wouldn't be naked shorting, it would simply be having a short term short position.
MMs do it in order to make a market in penny stocks. Retail investors very occasionally, but hardly ever due to the margin cost and limited upside vs. unlimited downside.