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Imagine a world where an individual did all this shorting. A different individual then sees it and buys all outstanding shares of the company, and decides they

Imagine a world where an individual did all this shorting. A different individual then sees it and buys all outstanding shares of the company, and decides they are long on the company and only want to hold their shares. How does the shorter now settle up their positions in this scenario? With 140% of the company’s stock shorter it becomes easier to get into this state.

roenxi 6y ago
What law would that break? It isn't fraud, the individual could still reasonably expect to to be able to fulfil the contracts. Taking big risks with their own money is not illegal.
Jarwain 6y ago
Matt Levine talks about something along these lines happening here: https://dealbreaker.com/2012/06/phil-falcones-alleged-piggish-behavior-made-him-some-enemies https://dealbreaker.com/2012/06/phil-falcones-alleged-piggis... The TLDR (also written by him): Falcone owned some bonds of a company called MAAX Holdings Inc. “After hearing rumors that a Wall Street financial services firm was shorting the MAAX bonds and also encouraging its customers to do the same, Falcone decided to seek revenge.” So he bought all the MAAX bonds. Then he bought more: Short sellers would borrow MAAX bonds (presumably from him), and then sell them to him, so that he ended up with “22 million more bonds than MAAX had ever issued.” Then he stopped lending them out, forcing the short sellers to buy bonds to cover their shorts. But there were no bonds to be bought, since he owned them all (and more). At some point an executive from the “Wall Street firm” called up Falcone to talk about the situation, and even in the SEC’s dry language you can tell that it was one of the greatest conversations in all of Wall Street history: > At some point, the conversation turned to the trading in the MAAX bonds. The senior officer asked Falcone how the Wall Street firm might satisfy its obligation to Harbinger. Falcone stated that the Wall Street firm should just keep bidding for the bonds. Falcone acknowledged that the Wall Street firm would suffer some losses doing so, but told the senior officer and the others that sometimes you are just on the wrong side of a trade. > In the course of this discussion, Falcone stated that he knew that the short position in the MAAX zips had created a “long” position in excess of the issue size. When the senior officer asked how he could possibly know this, Falcone stated that he was working the position himself and that he (i.e., Harbinger) had acquired approximately 190 million bonds. The senior officer and the other the Wall Street firm personnel were stunned.
PeterisP 6y ago
Well, in that case the shorter can't settle up their positions, so they don't - that's not a crime, that's not illegal, they simply can't fulfil a part of their contract so they owe some amount of money as compensations to whomever they borrowed that stock from.

roenxi 6y ago

What law would that break? It isn't fraud, the individual could still reasonably expect to to be able to fulfil the contracts. Taking big risks with their own money is not illegal.

Jarwain 6y ago

Matt Levine talks about something along these lines happening here: https://dealbreaker.com/2012/06/phil-falcones-alleged-piggish-behavior-made-him-some-enemies https://dealbreaker.com/2012/06/phil-falcones-alleged-piggis... The TLDR (also written by him): Falcone owned some bonds of a company called MAAX Holdings Inc. “After hearing rumors that a Wall Street financial services firm was shorting the MAAX bonds and also encouraging its customers to do the same, Falcone decided to seek revenge.” So he bought all the MAAX bonds. Then he bought more: Short sellers would borrow MAAX bonds (presumably from him), and then sell them to him, so that he ended up with “22 million more bonds than MAAX had ever issued.” Then he stopped lending them out, forcing the short sellers to buy bonds to cover their shorts. But there were no bonds to be bought, since he owned them all (and more). At some point an executive from the “Wall Street firm” called up Falcone to talk about the situation, and even in the SEC’s dry language you can tell that it was one of the greatest conversations in all of Wall Street history: > At some point, the conversation turned to the trading in the MAAX bonds. The senior officer asked Falcone how the Wall Street firm might satisfy its obligation to Harbinger. Falcone stated that the Wall Street firm should just keep bidding for the bonds. Falcone acknowledged that the Wall Street firm would suffer some losses doing so, but told the senior officer and the others that sometimes you are just on the wrong side of a trade. > In the course of this discussion, Falcone stated that he knew that the short position in the MAAX zips had created a “long” position in excess of the issue size. When the senior officer asked how he could possibly know this, Falcone stated that he was working the position himself and that he (i.e., Harbinger) had acquired approximately 190 million bonds. The senior officer and the other the Wall Street firm personnel were stunned.

PeterisP 6y ago

Well, in that case the shorter can't settle up their positions, so they don't - that's not a crime, that's not illegal, they simply can't fulfil a part of their contract so they owe some amount of money as compensations to whomever they borrowed that stock from.