I know it's hard to believe that there are people out there with serious coin that get caught up in these scams. There aren't many, but there are a few.
David Patch himself has claimed to have sunk close to a million into Jag Media. (No, he is not one of my contras.) In my last (failed) attempt to take a naked short position in one of these train wrecks, I got introduced to a guy who had been calling various trading desks asking to be informed if anyone needed to unload a large block in a company we both happened to be watching. At the time, the stock was trading just shy of a dollar. I offered him long exposure at 85 cents in exchange for agreeing to a 27-month hold. He countered with 70 cents and a 15-month hold.
I just couldn't stomach the idea of giving him a 30% discount to the market, he wouldn't budge, and nothing came of it. In retrospect, I should have shut up and done the deal (the stock is under 50 cents now), but I just wasn't willing to give him such a sweet deal.
As for contra party risk management, for both sides, you set up an escrow account. The buyer deposits the agreed upon purchase price. They're obviously concerned that I would walk away if the stock soars. I'm responsible for maintaining the balance at a level that's typically 110% to 150% of the market price, marked to market weekly. I fail to meet escrow, the account defaults to the buyer.
It's not a perfect situation for either party. If the stock spikes 70% in one week and I fail to meet escrow, the buyer is out a portion of the gain. I have to accept a much lower price than the market price to go short. Both parties are subjected to risks that mainstream investors don't encounter when using a traditional b/d account.
Singling out those investors with deep pockets has, in my opinion, become more trouble than its worth. That's why I've shifted my focus to stocks with listed options. You won't find the same concentration of brain dead investors like accadacca, nufced, or gump that you might find in a company like CMKM Diamonds, but you can still find plenty of goobers complaining about "naked short sellers".
And so far I have yet to find a better telltale of impending corporate doom than a bunch of goobers complaining about "naked short sellers".
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