July 17, 2008
The present situation of persistent failure-to-deliver on short sales of stock ("naked shorts") is an abomination, and presently illegal. Strict and prompt enforcement is vital for the well-being of the U.S. financial markets. Small capitalization, early-stage companies have been particularly affected, to the point that they become non-viable. If you were an early stage company, you would have to consider listing on another exchange due to the SEC's persistent failure to enforce existing regulations regarding long-term FTDs. Even larger stocks, in the multi-billion market cap range, are affected regularly.
FTDs that persist to seven trading days are forced to resolve their delivery problems by buying stock in the open market if necessary. This allows more than enough time for the occasional honest mistake. Existing FTDs of more than seven trading days will have a one-time 30 day grace period to resolve their FTDs. Failure to resolve FTDs after seven additional days after the seven-day deadline results in a cash penalty, paid to the SEC, equal to twice the full sale value of the undelivered securities. Half of this penalty, or the sale price of the undelivered security, is given to the FTD holder (buyer) to fully unwind an unsuccessful transaction.
Entities, such as hedge funds, that hold large FTDs ("naked shorts") that cannot be explained as an honest mistake, shall be prosecuted as per existing regulations.
Of course, regulations regarding FTDs ("naked shorts") must apply to all securities listed on the U.S. SEC regulated exchanges, not just certain large financial companies.
Here's a good primer on the naked short problem, which, if anything, has become worse since this was created.
Kiku Capital Management LLC