Naked Shorts' Long Shelf Life

Overstock's Patrick Byrne, an outspoken CEO who has dared hedge fund managers to confront him on earnings calls, has another explanation. "Regulation SHO is toothless," says Byrne. "The regulators have decided to give free passes to criminals."

That's a pretty blunt assessment, but it finds a little support in the interesting coincidence that many of the longtimers on the threshold list are the same stocks favored by short-sellers. The short interest of Overstock (i.e., the number of shares legitimately borrowed and sold short) is 6.5 million shares, or 52% of its float. The short interest in Netflix, Taser and Global Crossing(GLBC) are, respectively, at 30%, 31% and 48% of their floats.

Data on naked short-selling isn't as transparent as it is on plain old-fashioned short-selling. The SEC doesn't require disclosure of how many shares have failed to deliver, which is too bad, because there's a good deal of disagreement on how widespread naked short-selling is. Some people, including investors at hedge funds, maintain it's all a tempest in a teapot. Others, like Byrne, suggest it's become too big a problem for regulators to rein in.

Regulatory agencies like the SEC often face tough choices in deploying scarce resources to fight an ever-shifting menace of investment fraud. But the SEC could make enforcement of Regulation SHO a lot easier by enlisting the help of the market itself: Why not simply disclose the size of the naked-short position in each stock as well as the broker-dealer responsible for clearing out the position?

If the naked-short positions are disarmingly small, investors will know that it is indeed a tempest in a teapot. And if the positions are large, they'll know who to call.

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