61 Pages Posted: 27 Feb 2011
Date Written: Spring 2009
Recent lawsuits claiming market manipulation through naked short-selling have failed to produce remedies for the alleged injured parties; no private plaintiff yet has won a final judgment, with damages, based on allegations of naked short-selling. Despite this poor track record, naked short-selling litigation has proliferated in the post-Enron era, as struggling small-cap companies blame naked short-sellers for their sagging stock prices, and with the plaintiffs’ bar pursuing the naked short as a Holy Grail because of the potentially huge damage awards.
This article explores the origins of naked short-selling litigation; considers the failures of significant naked short-selling lawsuits in federal court; surveys the obstacles erected collectively by constitutional standing requirements, the Federal Rules of Civil Procedure, the Private Securities Litigation Reform Act, brokerage firms, death spiral financiers, and the Depository Trust and Clearing Corporation; examines the efficacy of Regulation SHO, SEC rule 10b-21, and new FINRA rules; discusses recent state legislation and state court litigation; and identifies non-litigation options to curb naked short-selling. Ultimately, this article seeks to answer the question: If manipulative naked short-selling is more than a mythological scapegoat for small cap failure, what remedies are, or should be, available?
Keywords: naked short selling, SEC, regulation, litigation, PSLRA, DTCC
JEL Classification: G18, K22, K41
Suggested Citation: Suggested Citation
Stokes, Alexis Brown, In Pursuit of the Naked Short (Spring 2009). New York University Journal of Law and Business, Vol. 5, No. 1, 2009. Available at SSRN: https://ssrn.com/abstract=1769014