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.