9 ms·

Wow, how has nobody noticed this before? This looks seriously rotten: > Michigan-based entrepreneur Robert Simpson decided to see what would happen if he bough

by eloff 6y ago

Wow, how has nobody noticed this before? This looks seriously rotten: > Michigan-based entrepreneur Robert Simpson decided to see what would happen if he bought the entire stock of one company. Using a single broker, within a couple of days Simpson had paid a little over $5,000 for 1,285,050 shares in OTC bulletin board property-development company Global Links. According to Simpson, these shares were delivered into his account shortly afterwards. Yet the following day 37,044,500 Global Links shares were traded on the bulletin board. The next day, 22,471,000 shares were traded. On neither day had Simpson traded a single Global Link share, he insists. And events surrounding Simpson's investments became yet more confusing. Global Links had only ever issued 1,158,064 shares. Simpson had managed to acquire 126,986 shares that did not exist. How he had managed to be sold more shares than were in issuance is exactly the question Simpson hoped his foray would raise.

fractionalhare 6y ago
It was noticed. The SEC even had data supporting Global Links' claims. This incident is almost 16 years old and was later investigated by the SEC.
- eloff 6y ago
  So do you know what was the outcome then? Are there mechanisms to prevent this now? Did the players involved get fined?
  - fractionalhare 6y ago
    I don't know the outcome of their investigation on this specific incident, and I can't (quickly) find it. But I know the SEC made a few changes in the mid - late 2000s as a result of naked short selling rising to mainstream awareness: https://www.sec.gov/news/press/2009/2009-172.htm https://www.sec.gov/news/press/2009/2009-172.htm. It became a pretty big point of discussion for regulating Wall Street which was amplified in the fallout of the 2008 financial crisis. As far as outcomes go, there is this testimony from the SEC chair circa 2010: http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2010-01-14%20Mary%20Schapiro%20Written%20Testimony.pdf http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2010... > In July 2009, the Commission adopted a rule which requires that “fails to deliver” in all equity securities be promptly closed out. “Fails to deliver” may, among other things, be indicative of potentially abusive “naked” short selling. “Naked” short selling, which is not per se illegal, occurs when a short seller does not borrow securities in time to make delivery. Sellers may intentionally fail to deliver as part of a scheme to manipulate the price of a security or possibly to avoid borrowing costs. Data indicates that since the fall of 2008, fails to deliver in all equity securities have declined by 63.4 percent, and fails to deliver in securities with persistent and large levels of fails to deliver have declined by 80.5 percent.
    - mcgoo 6y ago
      If I recall, both stock and option market makers were allowed to fail to deliver, which would typically be cheaper than cost of borrowing, which made it another good source of edge that was unavailable to non-market makers.
      - oa335 6y ago
        Last I checked they were still subject to delivery requirements, but had a substantially longer time to find the shares (10 days iirc).
        fapjacks 6y ago
        Twenty-one days versus three for everybody else. But it's also possible to turn a naked short into a disclosed short via a naked call option (which also is not backed by an actual share).
        totalZero 6y ago
        > it's also possible to turn a naked short into a disclosed short via a naked call option (which also is not backed by an actual share) This is called a reset transaction, and it is not permitted. Assuming that XYZ is a hard to borrow security, and that Trader A, or its broker-dealer, is unable (or unwilling) to borrow shares to make delivery on the short sale of actual shares, the short sale may result in a fail to deliver position at Trader A’s clearing firm. Rather than paying the borrowing fee on the shares to make delivery, or unwinding the position by purchasing the shares in the market, Trader A might next enter into a trade that gives the appearance of satisfying the broker-dealer’s close-out requirement, but in reality allows Trader A to maintain its short position without ever delivering on the short sale. Most often, this is done through the use of a buy-write trade, but may also be done as a married put and may incorporate the use of short term FLEX options. These trades are commonly referred to as “reset transactions,” in that they have the effect of resetting the time that the broker-dealer must purchase or borrow the stock to close-out a fail. The transactions could be designed solely to give the appearance of delivering the shares, when in reality the trader has no intention of meeting his delivery obligations. The buy-writes may be (but are not always) prearranged trades between market- makers or parties claiming to be market makers. The price in these transactions is determined so that the short seller pays a small price to the other market-maker for the trade, resulting in no economic benefit to the short seller for the reset transaction other than to give the appearance of meeting his delivery obligations. Such transactions were alleged by the Commission to be sham transactions in recent enforcement cases. Such transactions between traders or any market participants have also been found to constitute a violation of a clearing firm’s responsibility to close out a failure to deliver. https://www.sec.gov/about/offices/ocie/options-trading-risk-alert.pdf https://www.sec.gov/about/offices/ocie/options-trading-risk-... (Start at the bottom of Page 7)
  - toast0 6y ago
    I don't know the specific outcome of this case. However, naked short selling is now prohibited by SEC regulation SHO, except for by 'bona fide market makers'. Broker/dealers have an obligation to fix failure to deliver by their clients with specific timelines; etc. Bona fide market makers have an exception, because their business is to always be being buying and selling around market prices, and in a market with lots of buy interest and less sell interest, they may need to sell more shares than they normally hold. Market makers still need to have the shares in time for settlement, which may require borrowing if they have net sales more than holdings in a given day, but they don't need to locate shares to borrow before selling. Market makers are given an exception, because liquidity is valued, and they need to be registered and have specific capital requirements etc. TL;DR, naked short selling isn't a thing anymore. There's been no reports of Gamestop shorts being naked shorts, and no reports of shares failing to deliver on time. Naked shorting isn't required for short interest to be over 100%.
    - sweettea 6y ago
      You might take aa look at the SEC's December reports of fail-to-delivers, before the GME rocket lit: there were three days with over a million shares failed to be delivered, and several more weeks with over .5%. WSB had a post encouraging everyone to file a SEC report over this back then.
      - fractionalhare 6y ago
        You should cite the posts and resources you've mentioned, because there are a variety of caveats that approximately all the posts on WSB misinterpret. People will fly by a comment like this and just repeat it without any fact checking. The very page you describe specifically states that you can't infer when failures to deliver occurred because the data is reported in aggregate with no age statistics. [1] Moreover failures to deliver can occur on both the long and short side, and do not necessarily represent that a naked short sale occurred. [2] And when they are associated with a naked short sale, it may still be legitimate. Market makers are legally allowed to engage in naked short sales to facilitate liquidity, and if they can't fulfill the borrow in time (which would itself happen for legitimate reasons), that failure to deliver would also be reported. Finally - reporting an increase in apparent naked sales to the SEC by gesturing towards data on the SEC website doesn't make sense. The SEC is definitionally aware of it. There may not be an active investigation, but these kinds of datapulls are pretty manual and staffed by people familiar with the data. 1. https://www.sec.gov/data/foiadocsfailsdatahtm https://www.sec.gov/data/foiadocsfailsdatahtm 2. https://www.sec.gov/investor/pubs/regsho.htm https://www.sec.gov/investor/pubs/regsho.htm
rwmj 6y ago
I think the more interesting part of the story (if I'm reading it right) is he paid $5000 to completely own a company with millions in assets.
- njharman 6y ago
  > own a company No "owned the publicly traded shares of a company". Those shares are almost certainly non-ownership, voting shares. And if they are it's possible/probable that founders/investors/others hold an arbitrarily large multiple of traded shares or options for shares or convertible bonds or whatever. What he owns is (somewhere in the line of creditors) the right to some part of assets if it's dissolved (sold, enters bankruptcy) exact triggers and rights are complex and varied.
  - psychlops 6y ago
    > What he owns is (somewhere in the line of creditors) the right to some part of assets if it's dissolved (sold, enters bankruptcy) exact triggers and rights are complex and varied. After all liabilities are deducted. Which usually means nothing.
- pantalaimon 6y ago
  is that really how it works?
  - VBprogrammer 6y ago
    Unless there was something fishy about the share classes. Non-voting shares perhaps?
  - londons_explore 6y ago
    Yes, but it's possible the company also had a bigger debt than assets and no hope of turning things around...
- sn_master 6y ago
  Not sure about this case, but owning all trading shares doesn't mean owning the company. A company may have only 2% of its value as public shares and the rest owned by the company itself.
LatteLazy 6y ago
His broker lent the stock back out. This is one more way brokers make a living: charging rent for shares lent to shorts.
- ketamine__ 6y ago
  So what would have happened if he sold them all at the same time?
  - LatteLazy 6y ago
    His broker can recall the lent stock, so they'd recall it and have it sent to whoever bought it on their/his behalf. I worked on a computer system to handle all this for a while. It was front office so as well as buy/sell transactions we had to process lend/return and borrow/return actions to actually understand the company position. Within each of those are lend request messages with approval/declines etc.
    - esrauch 6y ago
      I don't understand how this can work. The broker loans the share to person B. Person B sells the share to person C (as B wants to short the stock). How can the Broker recall the share: they have no relationship with the current owner of the stock. Even if the broker demanded B rebuy a share to return the stock, since the original guy owner all liquid shares, it would only take one other share holder to holdout to make the share return impossible.
      - LatteLazy 6y ago
        The Broker calls Person B. Person B has 1 day to get the share back or they're in default. It's up to Person B to buy back from whoever is selling at whatever price they want. It is possible for short sellers to get caught as you describe (someone owns all the stock and they have bought 1 additional share and now wont sell). But it's very rare. It requires a few things to all happen at the same time: * 1 person has to own all the stock. This in itself is very unusual. In many jurisdictions there are a whole bunch of extra requirements once you own more than X%. * Someone has to want to short the company. If it's small enough to be owned entirely by 1 person, it's probably too small to attract short sellers or to be lent. Unless someone BOTH wants to short this small stock, AND happens to know the broker in question has some, no one knows who to ask to borrow it. * They have to short it over 100%. This is unlikely, since a small company that's been bought entirely by 1 person, who is left to buy more? The market is one sided as apparently the only buyer is the guy holding 100% already (if anyone else bought those shares, they could sell them back to the shorter). It's really really rare. Technically the short seller defaults when they cannot source the stock, he has to absorb whatever losses he's caused the broker.
femto113 6y ago
There were some compounding factors for this situation, in particular a reverse split. "Global Links was caught off guard by the events that transpired in February 2005 when it implemented a one-for-350 reverse split of its stock, the result of which would reduce its float from 350 million shares to 1.1 million. ... Some have said it is all a simple matter of broker error. Accounts showing 350,000 old shares of Global Links should have been adjusted by the broker to show 350 [sic, should be 1000?] of the new shares, but some have said that didn't happen" https://www.forbes.com/2006/08/25/naked-shorts-global-links-cx_lm_0825naked.html?sh=2b7a83c28400 https://www.forbes.com/2006/08/25/naked-shorts-global-links-...
cush 6y ago
Were you able to access the entire article? I can only see page 1 of 6
- bredren 6y ago
  https://www.euromoney.com/article/b1320xkhl0443w/naked-shorting-the-curious-incident-of-the-shares-that-didnt-exist https://www.euromoney.com/article/b1320xkhl0443w/naked-short...
  - dang 6y ago
    URL changed to that now (from https://web.archive.org/web/20160215135645/https://www.euromoney.com/Article/1001047/Naked-shorting-The-curious-incident-of-the-shares-that-didnt-.html https://web.archive.org/web/20160215135645/https://www.eurom...). Thanks!
WanderPanda 6y ago
Wow this is infuriating! We are living in a world where nothing is real and everything is an IoU

by eloff 6y ago

fractionalhare 6y ago

It was noticed. The SEC even had data supporting Global Links' claims. This incident is almost 16 years old and was later investigated by the SEC.

eloff 6y ago
So do you know what was the outcome then? Are there mechanisms to prevent this now? Did the players involved get fined?
- fractionalhare 6y ago
  I don't know the outcome of their investigation on this specific incident, and I can't (quickly) find it. But I know the SEC made a few changes in the mid - late 2000s as a result of naked short selling rising to mainstream awareness: https://www.sec.gov/news/press/2009/2009-172.htm https://www.sec.gov/news/press/2009/2009-172.htm. It became a pretty big point of discussion for regulating Wall Street which was amplified in the fallout of the 2008 financial crisis. As far as outcomes go, there is this testimony from the SEC chair circa 2010: http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2010-01-14%20Mary%20Schapiro%20Written%20Testimony.pdf http://fcic-static.law.stanford.edu/cdn_media/fcic-docs/2010... > In July 2009, the Commission adopted a rule which requires that “fails to deliver” in all equity securities be promptly closed out. “Fails to deliver” may, among other things, be indicative of potentially abusive “naked” short selling. “Naked” short selling, which is not per se illegal, occurs when a short seller does not borrow securities in time to make delivery. Sellers may intentionally fail to deliver as part of a scheme to manipulate the price of a security or possibly to avoid borrowing costs. Data indicates that since the fall of 2008, fails to deliver in all equity securities have declined by 63.4 percent, and fails to deliver in securities with persistent and large levels of fails to deliver have declined by 80.5 percent.
  - mcgoo 6y ago
    If I recall, both stock and option market makers were allowed to fail to deliver, which would typically be cheaper than cost of borrowing, which made it another good source of edge that was unavailable to non-market makers.
    - oa335 6y ago
      Last I checked they were still subject to delivery requirements, but had a substantially longer time to find the shares (10 days iirc).
      - fapjacks 6y ago
        Twenty-one days versus three for everybody else. But it's also possible to turn a naked short into a disclosed short via a naked call option (which also is not backed by an actual share).
        totalZero 6y ago
        > it's also possible to turn a naked short into a disclosed short via a naked call option (which also is not backed by an actual share) This is called a reset transaction, and it is not permitted. Assuming that XYZ is a hard to borrow security, and that Trader A, or its broker-dealer, is unable (or unwilling) to borrow shares to make delivery on the short sale of actual shares, the short sale may result in a fail to deliver position at Trader A’s clearing firm. Rather than paying the borrowing fee on the shares to make delivery, or unwinding the position by purchasing the shares in the market, Trader A might next enter into a trade that gives the appearance of satisfying the broker-dealer’s close-out requirement, but in reality allows Trader A to maintain its short position without ever delivering on the short sale. Most often, this is done through the use of a buy-write trade, but may also be done as a married put and may incorporate the use of short term FLEX options. These trades are commonly referred to as “reset transactions,” in that they have the effect of resetting the time that the broker-dealer must purchase or borrow the stock to close-out a fail. The transactions could be designed solely to give the appearance of delivering the shares, when in reality the trader has no intention of meeting his delivery obligations. The buy-writes may be (but are not always) prearranged trades between market- makers or parties claiming to be market makers. The price in these transactions is determined so that the short seller pays a small price to the other market-maker for the trade, resulting in no economic benefit to the short seller for the reset transaction other than to give the appearance of meeting his delivery obligations. Such transactions were alleged by the Commission to be sham transactions in recent enforcement cases. Such transactions between traders or any market participants have also been found to constitute a violation of a clearing firm’s responsibility to close out a failure to deliver. https://www.sec.gov/about/offices/ocie/options-trading-risk-alert.pdf https://www.sec.gov/about/offices/ocie/options-trading-risk-... (Start at the bottom of Page 7)
- toast0 6y ago
  I don't know the specific outcome of this case. However, naked short selling is now prohibited by SEC regulation SHO, except for by 'bona fide market makers'. Broker/dealers have an obligation to fix failure to deliver by their clients with specific timelines; etc. Bona fide market makers have an exception, because their business is to always be being buying and selling around market prices, and in a market with lots of buy interest and less sell interest, they may need to sell more shares than they normally hold. Market makers still need to have the shares in time for settlement, which may require borrowing if they have net sales more than holdings in a given day, but they don't need to locate shares to borrow before selling. Market makers are given an exception, because liquidity is valued, and they need to be registered and have specific capital requirements etc. TL;DR, naked short selling isn't a thing anymore. There's been no reports of Gamestop shorts being naked shorts, and no reports of shares failing to deliver on time. Naked shorting isn't required for short interest to be over 100%.
  - sweettea 6y ago
    You might take aa look at the SEC's December reports of fail-to-delivers, before the GME rocket lit: there were three days with over a million shares failed to be delivered, and several more weeks with over .5%. WSB had a post encouraging everyone to file a SEC report over this back then.
    - fractionalhare 6y ago
      You should cite the posts and resources you've mentioned, because there are a variety of caveats that approximately all the posts on WSB misinterpret. People will fly by a comment like this and just repeat it without any fact checking. The very page you describe specifically states that you can't infer when failures to deliver occurred because the data is reported in aggregate with no age statistics. [1] Moreover failures to deliver can occur on both the long and short side, and do not necessarily represent that a naked short sale occurred. [2] And when they are associated with a naked short sale, it may still be legitimate. Market makers are legally allowed to engage in naked short sales to facilitate liquidity, and if they can't fulfill the borrow in time (which would itself happen for legitimate reasons), that failure to deliver would also be reported. Finally - reporting an increase in apparent naked sales to the SEC by gesturing towards data on the SEC website doesn't make sense. The SEC is definitionally aware of it. There may not be an active investigation, but these kinds of datapulls are pretty manual and staffed by people familiar with the data. 1. https://www.sec.gov/data/foiadocsfailsdatahtm https://www.sec.gov/data/foiadocsfailsdatahtm 2. https://www.sec.gov/investor/pubs/regsho.htm https://www.sec.gov/investor/pubs/regsho.htm

rwmj 6y ago

I think the more interesting part of the story (if I'm reading it right) is he paid $5000 to completely own a company with millions in assets.

njharman 6y ago
> own a company No "owned the publicly traded shares of a company". Those shares are almost certainly non-ownership, voting shares. And if they are it's possible/probable that founders/investors/others hold an arbitrarily large multiple of traded shares or options for shares or convertible bonds or whatever. What he owns is (somewhere in the line of creditors) the right to some part of assets if it's dissolved (sold, enters bankruptcy) exact triggers and rights are complex and varied.
- psychlops 6y ago
  > What he owns is (somewhere in the line of creditors) the right to some part of assets if it's dissolved (sold, enters bankruptcy) exact triggers and rights are complex and varied. After all liabilities are deducted. Which usually means nothing.
pantalaimon 6y ago
is that really how it works?
- VBprogrammer 6y ago
  Unless there was something fishy about the share classes. Non-voting shares perhaps?
- londons_explore 6y ago
  Yes, but it's possible the company also had a bigger debt than assets and no hope of turning things around...
sn_master 6y ago
Not sure about this case, but owning all trading shares doesn't mean owning the company. A company may have only 2% of its value as public shares and the rest owned by the company itself.

LatteLazy 6y ago

His broker lent the stock back out. This is one more way brokers make a living: charging rent for shares lent to shorts.

ketamine__ 6y ago
So what would have happened if he sold them all at the same time?
- LatteLazy 6y ago
  His broker can recall the lent stock, so they'd recall it and have it sent to whoever bought it on their/his behalf. I worked on a computer system to handle all this for a while. It was front office so as well as buy/sell transactions we had to process lend/return and borrow/return actions to actually understand the company position. Within each of those are lend request messages with approval/declines etc.
  - esrauch 6y ago
    I don't understand how this can work. The broker loans the share to person B. Person B sells the share to person C (as B wants to short the stock). How can the Broker recall the share: they have no relationship with the current owner of the stock. Even if the broker demanded B rebuy a share to return the stock, since the original guy owner all liquid shares, it would only take one other share holder to holdout to make the share return impossible.
    - LatteLazy 6y ago
      The Broker calls Person B. Person B has 1 day to get the share back or they're in default. It's up to Person B to buy back from whoever is selling at whatever price they want. It is possible for short sellers to get caught as you describe (someone owns all the stock and they have bought 1 additional share and now wont sell). But it's very rare. It requires a few things to all happen at the same time: * 1 person has to own all the stock. This in itself is very unusual. In many jurisdictions there are a whole bunch of extra requirements once you own more than X%. * Someone has to want to short the company. If it's small enough to be owned entirely by 1 person, it's probably too small to attract short sellers or to be lent. Unless someone BOTH wants to short this small stock, AND happens to know the broker in question has some, no one knows who to ask to borrow it. * They have to short it over 100%. This is unlikely, since a small company that's been bought entirely by 1 person, who is left to buy more? The market is one sided as apparently the only buyer is the guy holding 100% already (if anyone else bought those shares, they could sell them back to the shorter). It's really really rare. Technically the short seller defaults when they cannot source the stock, he has to absorb whatever losses he's caused the broker.

femto113 6y ago

There were some compounding factors for this situation, in particular a reverse split. "Global Links was caught off guard by the events that transpired in February 2005 when it implemented a one-for-350 reverse split of its stock, the result of which would reduce its float from 350 million shares to 1.1 million. ... Some have said it is all a simple matter of broker error. Accounts showing 350,000 old shares of Global Links should have been adjusted by the broker to show 350 [sic, should be 1000?] of the new shares, but some have said that didn't happen" https://www.forbes.com/2006/08/25/naked-shorts-global-links-cx_lm_0825naked.html?sh=2b7a83c28400 https://www.forbes.com/2006/08/25/naked-shorts-global-links-...

cush 6y ago

Were you able to access the entire article? I can only see page 1 of 6

bredren 6y ago
https://www.euromoney.com/article/b1320xkhl0443w/naked-shorting-the-curious-incident-of-the-shares-that-didnt-exist https://www.euromoney.com/article/b1320xkhl0443w/naked-short...
- dang 6y ago
  URL changed to that now (from https://web.archive.org/web/20160215135645/https://www.euromoney.com/Article/1001047/Naked-shorting-The-curious-incident-of-the-shares-that-didnt-.html https://web.archive.org/web/20160215135645/https://www.eurom...). Thanks!

WanderPanda 6y ago

Wow this is infuriating! We are living in a world where nothing is real and everything is an IoU