Naked Shorts' Long Shelf Life

What if they passed a law and no one followed it?

Not one of those bizarre, outdated laws you hear about -- like in Maine, where people are required to bring shotguns to church -- but a brand new law with an entirely sensible goal, like keeping people from selling equities that don't exist.

Since January, Regulation SHO has required self-regulatory organizations like the NYSE or the NASD to keep a "threshold list" of securities that have a sizable failure-to-deliver position. That is, they must disclose daily the stocks that someone sold without either owning them or borrowing them.

Selling stocks that nobody owns, called naked short-selling, isn't necessarily illegal. Broker-dealers may sell imaginary shares to maintain liquidity in a stock that sees a sudden surge in demand. So the Securities and Exchange Commission gives broker-dealers a 13-day grace period before they are required to close out those naked-short positions. After 13 days, it's safer to assume there must be at least some abusive shorting going on.

Last month, TheStreet.com noticed that Internet Initiative Japan(IIJI), a Nasdaq-traded ADS that had seen some spectacular and mysterious volatility coinciding with its aborted plans to issue new shares in Tokyo, had been on the NASD's threshold list for 17 days.

That seemed like an unusually long time back then. But IIJI has now been on the list for 39 straight days, according to Buyins.net, a site that compiles threshold-list data.

And that's just the tip of the iceberg. Buyins.net lists 59 other securities that have been on threshold lists for longer than IIJI has -- some of them for as long as 134 days. Of course, most are micro-cap stocks that are so illiquid it's not surprising broker-dealers find shares scarce.

But there are also 10 other companies, all traded on the Nasdaq, that have substantial daily volume and market caps between $150 million and $1.1 billion that have been on its threshold list for more than 26 days -- twice the allotted grace period after which the positions must be cleared out. They include well-known names like Netflix(NFLX), Taser International(TASR) and Overstock.com(OSTK) -- hardly illiquid, yet they've been on the threshold list for months.

Overstaying Their Welcome? It's not just micro-caps that languish on NASD's threshold list
	Ticker	Name	Days on List	Market Cap (millions)	Short Ratio	Shares Short as % of Float*
1	NFLX	NETFLIX	134	$1,100	15.5	30.4%
2	GIVN	GIVEN IMAGING	134	$637	17.9	13.5%
3	TASR	TASER INTERNATIONAL	134	$567	5.8	31.6%
4	GLBC	GLOBAL CROSSING	134	$397	22.3	47.7%
5	CALM	CAL-MAINE FOODS	134	$149	10.8	11.8%
6	NAVR	NAVARRE CORP	74	$247	30.4	35.3%
7	OSTK	OVERSTOCK.COM	72	$858	14.0	51.7%
8	ENWV	ENDWAVE CORP	45	$328	11.0	26.1%
9	IIJI	INTERNET INITIATIVE JAPAN	39	$777	0.2	N/A
10	AGEN	ANTIGENICS	33	$257	27.7	27.4%
11	OVEN	TURBOCHEF TECHNOLOGIES	30	$481	7.7	40.5%
Source: buyins.net, yahoo finance *as of 7/12/05.