Nein! Germany Wrong to Blame Naked Short Sales: Gary Weiss

So we have an old villain in the European financial crisis. Hey, why bother with a new villain when an old one will do?

I'm talking about Germany's crackdown on the Dr. Caligari of finance, naked short selling. When I heard about that, the moths flew out of my brain. I was veritably bathed in nostalgia.

Naked shorting is the best villain you can have if you're running something that issues or sells stocks. I learned that for the first time back in the spring of 1987.

The market was climbing wonderfully and, as you know, stocks must not ever go down. That's for Bolsheviks. Stocks can only legitimately go up, for otherwise something terrible is happening! (And not with the companies issuing the stock, or the stock promoters or brokerages selling them).

At the time, the victims were stocks being sold by a wonderful little brokerage firm called Haas Securities. In a tear-jerking article, Businessweek described how Haas was "fighting back" against these fiends. I was new to BW at the time and I remember how that sob story prompted a rather nasty rejoinder from Barron's, which had run an article saying the stocks Haas marketed were frauds.

It turned out that we had been bamboozled. At the time the BW article appeared, Haas Securities was in the middle of a $644 million stock-rigging scheme involving the same stocks mentioned in the article. In 1990, Haas's president and chairman were sentenced to prison terms for securities fraud.

Since then I have viewed naked shorting claims with suspicion. Whatever naked shorting might have gone on -- and none was ever proven for the Haas stocks --the real problem can almost be guaranteed to be anything but naked, clothed, or any other kind of shorting.

Just look at the companies that have screamed the loudest about naked shorting. The loudest is Overstock.com(OSTK), which recently had to restate earnings going back quite a ways , turning gains into losses, because its accounting hadn't followed GAAP. The story is neglected in the media, but has had some good coverage in financial blogs, including the one by Sam Antar of Crazy Eddie fame -- a Harry Markopolos-style whistleblower who has been thanked for his efforts by an Overstock smear campaign. Naked shorting is a favorite excuse of the pink sheet crowd, such as the subprime doggy Novastar Financial, the OTC crud Universal Express and last but not least CMKM Diamonds, whose former CEO has been indicted and is now a fugitive. Enron was also a victim of naked shorting, if you read some of the kookier websites. Martha Stewart Living(MSO), Dendreon(DNDN), Netflix(NFLX) and Taser International (TASR) are also on the lists circulated by conspiracy types.