Hah,no I am not a marlet maker nor do I represent one. Just because I question urban legends doesnt mean anything more than as a speculator I try to learn as much as I can.
Here is why changing the CUSIP number works ( restircted stock being issued doesnt effect this). Back in the 60's during the gog-go years physical certificates were still widely used to settle trades. as volume grew this system became very unwieldy and subject to many abuses. So the CEDE/DTC system emerged.
Say a company has 1 million free trading shares, those are in the CEDE inventory. If broker A buys 100,000 shares, and broker B sells 100,000 shares, they both have credit/debit to their accounts via CEDE. No matter what trading activity occurs, the CEDE balance is supposed to balance aganst the CEDE certificates held ,i.e. 1 million shares, which is on the books of the transfer agent of the company.However if the company for example chanegs its name ad requires a new CUSIP number, CEDE has to return "certificates" ( may be book entry which is anotehr matter) to the transfer agent in exchange for the certificates under the new CUSIP number.
The market maker often goes through a clearing agent, or the broker places traade with market maker if they are not market maker themselves, and ultimately through a clearing agent. When Reg SHO/fail to deliver reporting started one of reasons was some market makers did either through error or possibly speculation sell more shares than they brought in. Since the market makers have 3 days to settle all trades, and if I recall they can file for an extension of an additional 7 days, theoretically they could naked short sell during that period. Why wouldnt they ? (a) reduces their net working capital which reduces their ability to trade (b) they take a risk they would have to cover- and frankly most market makers simply not in the business of speculating in stocks, but insetad capturing teh spread and commissions. (c) FNRA the last few years especially since scandals involving purchases/sales on Frankfurt exchange, watches these things much closer and can fine market makers for abuses.
A bigger reason I have hard time believing maked short selling of sub $.05 stocks is CEDE/DTC f they allow an imbalance to occur, where one broker is owed 1.5 million shares for shares he bought but CEDE only has 1.0 million share son hand, CEDE has a liability.You will notice a few years ago CEDE started issuing more DTC chills on stocks- I cant prove it but my impression is one of reasons was to clear out stocks that had potential for abuses whatever the rules were.
I will take a glance at stock you mentioned, but issuing restricted stock normally is done for many reasons- a typical one is to incerase authorized shares so people can fall under the 10% or 5% thresholds ,so they either can sell shares ( as a non control person), or if SEC reporting fall under limits to report their trades.
The example you give is interesting- if a restricted stock dividend made that doesnt effect the cusip number, a cash dividend i know causes havoc if there was a short ( as the cash dividend must be paid on shares that presumably dont exist). Why stock would go up when a restricted stock dividend was declared I dont know the circumstances- coudl be (a) holder of stock about to do a promotion and wanted to sell shares but (b) wanted to keep same ownership so waited until dividend received.
Was that company a reporting company ? Out of interest what made you think the stock was naked shorted ?
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