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Naked Shorting

Christopher L. Culp

Risk Management Consulting Services, Inc.; Compass Lexecon

J.B. Heaton

Independent; Bartlit Beck Herman Palenchar & Scott LLP

April 26, 2007

A "naked short sale" is a short sale of stock in which the seller does not own the shares and essentially has no plans to acquire the stock by the settlement date. We review the standard economic arguments for and against the speculative short sale of equities and explain the strong economic similarities between permissible short selling and impermissible naked short selling. Despite the legal prohibitions on the latter, we show that, from an economic perspective, naked shorting is not fundamentally different from traditional short selling and is unlikely to have detrimental effects on capital markets. Nevertheless, we explain how naked shorting can provide the basis for securities manipulation lawsuits under the federal securities laws for long sellers and, in some circumstances, for issuers.

Number of Pages in PDF File: 30

Keywords: Naked Shorting, Short Selling, Manipulation

JEL Classification: G12, G21, G28, G32, K22, K42

working papers series

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Date posted: April 30, 2007  

Suggested Citation

Culp, Christopher L. and Heaton, J.B., Naked Shorting (April 26, 2007). Available at SSRN: http://ssrn.com/abstract=982898 or http://dx.doi.org/10.2139/ssrn.982898

Contact Information

Christopher L. Culp
Risk Management Consulting Services, Inc. ( email )
25 E Superior St
Chicago, IL 60611
United States
HOME PAGE: http://www.rmcsinc.com
Compass Lexecon ( email )
332 South Michigan Avenue
Suite 1300
Chicago, IL 60604
United States
J.B. Heaton (Contact Author)
No Address Available
Bartlit Beck Herman Palenchar & Scott LLP ( email )
Courthouse Place
54 West Hubbard Street
Chicago, IL 60610
United States
312-494-4425 (Phone)
312-494-4440 (Fax)
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