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Naked Short Selling : How Exposed Are Investors (2006)

NAKED SHORT SELLING: HOW EXPOSED ARE INVESTORS? +∗
James W. Christian,* Robert Shapiro,** & John-Paul Whalen***

I. INTRODUCTION
In early 2005, an investor named Robert Simpson quietly
orchestrated a stock trade that may have exposed serious
problems in America’s securities markets.1
Using a single broker,
Simpson purchased all 1,158,209 of the outstanding shares of
stock in a small real estate company named Global Links
Corporation2
for a grand total of $5,205.3
Simpson properly
completed this transaction and filed the appropriate paper work
with the Securities and Exchange Commission (SEC) denoting
his ownership interest in Global Links.4
Simpson then placed all
of the shares from his newest investment in his sock drawer for
what he thought would be safe keeping.5
Simpson’s first indication that this did not constitute an
ordinary stock purchase was when he completed an order for
1,158,209 shares of Global Links shares on the market even
though the company’s total number of shares available for
purchase amounted to only 1,158,064 shares—a small but
significant difference of 145 shares.6
The strange circumstances
surrounding Simpson’s purchase continued as he watched while
shares in the company continued to trade at high volumes in the

over-the-counter stock market.7
Despite Simpson’s ownership of
100% of the outstanding shares, 37 million Global Links shares
traded the next day, followed by another 22 million on the
following trading day, all without Simpson selling a single share
of stock.8
Incredibly, every share of Global Links stock had
changed hands sixty times in the two days following Simpson’s
acquisition, even though he supposedly had every single
outstanding share of the stock in his sock drawer.9
At roughly the same time but in another financial universe,10
Patrick Byrne, the CEO of NASDAQ company Overstock.com,11
began to notice strange trading patterns in his company’s stock.
Byrne noticed that on certain days the number of shares traded
in Overstock.com’s common stock amounted to four to five times
the total number of shares outstanding.12 These high trading
volumes persisted even though Byrne, his family, and ten allied
financial institutions supposedly held close to ninety-nine
percent of the outstanding shares.13 With this large block of

shares metaphorically tucked away in Byrne’s sock drawer,14
such high trading volumes seemed highly irregular, if not
impossible.
Along with their unusually high trading volumes, Global Links
and Overstock.com share another unsettling characteristic: over the
past year, both companies have experienced a dramatic drop in the
price of their common stock.15 Is there a link between the strange
trading patterns exhibited by Global Links and Overstock.com and
the downward pressure on the two companies’ share prices?16 Both
Simpson and Byrne adamantly contend that the link between their
depressed stock prices and the high trading volumes is not mere
coincidence.17 Byrne, Simpson, and many others18 believe that
Global Links, Overstock.com, and many other companies, both large
and small,19 are victims of a trading strategy known as naked short
selling.