"In the case of IIJ, it is evident that the stock's own volatility created the naked short position in the first place," says Ronk. "The fact that IIJ is an ADS could make the shares even more difficult to locate since U.S. brokerage firms may have to go overseas to request to borrow shares against short positions on their own books."

So, why is IIJ still on the list despite what appears to be an attempt to close out the position? Stocks routinely stay on the threshold list for five days after delivery failures have been cleared out. Also, new delivery failures may have appeared in the meantime.

Or, it could be that the exchanges are lax in forcing broker-dealers to actually close out the positions. Ronk notes that out of 299 companies on threshold lists, nearly half have been on those lists for more than 13 days.

Short-selling, of course, isn't illegal. And as the SEC points out in its Reg SHO explainer , naked short-selling isn't necessarily illegal either. Market makers, with the SEC's blessing, often sell shares of illiquid stocks without borrowing them, if they see a sudden surge in buying demand.

What is illegal, the SEC makes clear, is abusive shorting. "Short sales effected to manipulate the price of a stock are prohibited," the SEC says on its Reg SHO page. "It is prohibited for any person to engage in a series of transactions in order to create actual or apparent active trading in a security or to depress the price of a security for the purpose of inducing the purchase or sale of the security by others."

So, what happened with IIJ? Its delivery failures started in late May, after the company said it moved from a loss to a profit in its fiscal 2005 and further announced plans to list its shares on the Tokyo Stock Exchange. IIJ's stock had rallied from $3.08 to $4.50 in the three weeks prior to that announcement, but afterward it surged further, topping out at $13.90 on June 13.

So IIJ, a fairly illiquid ADS, experienced the kind of sudden demand that could force its market makers into legitimate naked short-selling. But there's still something that smells fishy about the stock's trading throughout June, and it's just the kind of smell that gets regulatory watchdogs sniffing around.

Reg SHO doesn't require any disclosure of the number of shares that went undelivered, or who the seller was. Whether and when IIJ's stock falls off the threshold list, however, should go some way toward showing why they weren't delivered. If it was merely market makers who were forced to sell IIJ shares to meet demand, the stock will disappear from the list shortly.

If not, it's a pretty good sign that whoever didn't like IIJ last month hasn't learned to love it in the meantime.

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