OK let’s look at your scenario.
“ In the mean time, the lender likely will short the stock regularly and cover as needed. In this particular example, the lender likely started shorting at .003 (yes, before the deal was signed). When the price got down to .002, the lender was entitled to 62mil shares. Up from 41mil at .003. When the price got to .001, the lender was entitled to 125mil shares or triple the original shares. If they sit on both the ask and the bid with large holdings, they can make even more money”
First…neither the conversion shares nor the warrant shares (from exercising) can be used to cover before they are free trading. That means a minimum of six months from the issue of the warrant or the note.
So shorting in the “mean time” has tremendous risk as you seem to acknowledge…in fact more so than any rational entity…such that no one would do it.
Let’s say they shorted 25 million shares at $0.003. The most they could make is $75,000. That’s it. BUT…they would have to put up OVER $60 million in margin to maintain the position.
Who is going to do that?
Nobody.
And we know in fact nobody is doing that.
How?
In the last year warrants exercisable into over 200 MILLION shares have been issued.
Yet in that same time period the short interest on this has been pretty steady (actually declining a little) in the 2.5-4 million share range. Literally NOBODY is taking out meaningful short positions. The current total position in the stock is less than $6000.
So it appears that nobody is actually doing what you are suggesting.
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