Naked Shorts Eye Internet Japan

Somebody really, really doesn't like Internet Initiative Japan(IIJI).

And whoever it is took a sudden dislike to the company last month. Short interest on the Tokyo-based company's American Depository Shares, which are traded on Nasdaq, soared nearly 1,500% to 1,769,292 shares in June from 90,539 shares in May, according to the exchange.

Naturally, volume on the stock rocketed as well. In May, some 91,000 shares of IIJ traded on average, but in June the figure surged to an average of 6,426,225 shares a day. Even in the early days of July, a normally sleepy time for trading as U.S. investors extend the Fourth of July weekend, trading has remained above a million shares a day as the stock has hovered between $7 and $8.

What's more, the stock has been the victim of so-called naked short-selling, or selling short shares that aren't borrowed in time to deliver them for settlement. IIJ shares have been on Nasdaq's Threshold List since June 9. Stocks appear on an exchange's threshold list when a short-seller fails to deliver shares to the buyer within the standard settlement period for five straight trading days.

The Securities and Exchange Commission's Regulation SHO, which took effect last January in an effort to combat naked short-selling, requires broker dealers to buy out failure-to-deliver positions in stocks that have been on a threshold list for 13 straight trading days. IIJ shares have been on the Nasdaq list for 17 straight days.

Tom Ronk, who keeps a list of threshold stocks on his Web site, Buyins.net, says a stock will often pop up around the time broker-dealers are required to close out failure-to-deliver positions. Sure enough, on June 27 -- IIJ's 13th day on the threshold list -- the stock shot up 23% and volume rose nearly sevenfold to 10.2 million shares.