Follow this link to a Bloomberg Special Report on Naked Short Selling. The link takes you to a 25 minute video.

Perhaps only 1% of the shares that are traded on any given day are caused by illegal short sales.  However, if you lose 90% of the value in a stock that you own, that 1% is pretty important.

I have discussed naked short selling in a couple of previous posts.  I have read a number of explanations of naked short selling.

There is one question that has been nagging at me for which I have never seen an explanation. I have posed this question to a web site that should have the answers.

Follow this link to my question.

I’d like an explanation of how the counterfeit shares of a naked short sale are covered up. People who think they bought real shares expect to get annual reports and expect to vote in shareholder meetings. How is it that the charade is maintained so that these people don’t complain when they don’t get what a share holder expects to get?

I saw a post from Sep 5, 2008 talking about the fact that there are over-votes in shareholder meetings due to these fake shares. I cannot understand why the vote isn’t immediately thrown out if more shares than exist are voted.

There has been one answer posted so far (as of March 17th, 2009 at 6:35 pm).  I don’t find this answer to square with the original post to which I alluded. That post was actually on July 20, 2008. The part that I found only marginally helpful in that original post said:

Bloomberg writes that the “Securities Transfer Association, a trade group for stock transfer agents, reviewed 341 shareholder votes in corporate contests in 2005. It found evidence of overvoting-the submission of too many ballots-in all 341 cases.”

If it is impossible to tell who owns legitimate shares in a company, how does this system continue to operate?  I suppose that it is similar to counterfeit money.  As long as the counterfeiting is kept below some threshold, then the system can continue to operate.  Of course the people who get left holding tha bag of counterfeits are just out of luck. With counterfeit money, it is eventually possible to detect what is counterfeit and what is real at least for physical money.  Maybe not so for electronic money.

The ability of a bank to lend money that its depositors think is safely in the bank and quaranteed by the FDIC is similar to short selling of shares borrowed from a broker.  This is only a minor step away from naked short selling.