Patrick Byrne: What Is Naked Shorting?

In the vast ocean of the financial marketplace, there's a myth that's been circulating for the past 10-15 years, and it's a doozy. This myth suggests that there's a heist underway, a crime so complex that it's shrouded in impenetrable jargon. It's as if the savings of everyday Americans are trapped in a giant fish tank, and some savvy individuals have discovered a hidden spigot to siphon it away, all without anyone up top noticing. Sounds like lunacy, right? Well, that's what I thought too, until I delved into this baffling enigma.

I was initially dismissive of these claims, brushing them aside as mere conspiracy theories. But then, one fateful day, a persistent individual managed to break through my skepticism. I vividly recall putting him on speakerphone as I packed my suitcase. What he described over the next 45 minutes was mind-boggling, an intricate financial riddle that left me dumbfounded. I was ready to dismiss him, but he laid down a set of predictions, a challenge that piqued my interest.

This man prophesied that five journalists would soon hound me with hatchet jobs, which was a scenario I'd never faced before. He predicted that I'd become the subject of a federal investigation, an eerie prospect, and that I'd find myself trading on obscure foreign exchanges in far-flung places like the Bahamas and Australia. Most strikingly, he foretold the Securities and Exchange Commission (SEC) publishing a list of companies experiencing a peculiar anomaly in their stock, the "Regulation SHO Threshold List." Astonishingly, only half a percent of companies would be on this list, and, according to him, I'd be one of them.

Intriguingly, within the next eight weeks, every single one of his predictions came to pass. The journalists descended like vultures, an FTC investigation flared briefly before fizzling out, we were trading on foreign exchanges I'd never even heard of, and there we were on the SEC's mysterious list. It was uncanny.

Unearthing the Financial Crack: The Phantom Shares Conspiracy

So, what was this bizarre financial puzzle he had unlocked? In the world of stock trading, the norm is simple: you hand over money, and in return, you receive your stock, a process known as settlement. However, there exists a loophole within the system. When it's time for me to deliver the stock you've purchased, I can instead offer an "I Owe You" (IOU) for some stock. You might not even notice, and this practice occurs only about one or two percent of the time.

This loophole may seem harmless, perhaps created for minor errors or mishaps, but the truth is far more sinister. Some hedge funds and rogue brokers have exploited this vulnerability, pumping hundreds of millions or even billions of fake shares into the market. These counterfeit shares, invisible to most investors, are like phantoms lurking in the financial shadows.

Unmasking the Consequences: A Three-Pronged Predicament

This clandestine maneuvering wreaks havoc on three fronts. The first, and perhaps the most unsettling, is the erosion of corporate democracy. A Bloomberg Markets article by Bob Drummond revealed a disturbing truth. In the inner workings of Wall Street, those responsible for tallying votes in corporate elections admitted that they often had no idea who was entitled to vote. Votes outnumbered shares, and the situation was, in their words, "positively criminal." The New York Stock Exchange even conducted a study on 341 elections, discovering over-voting in every single one.

The implications are staggering. Corporate democracy, the very bedrock of shareholder influence, has been compromised. The integrity of corporate elections, upon which board appointments and corporate governance rely, now rests on shaky ground.

The Mid-Size Menace: Destroying Companies One Phantom Share at a Time

The mid-size problem is equally disturbing. By manipulating this nefarious loophole, malevolent forces can systematically dismantle small-cap companies worth $300 million or less. Industries like biotechnology, finance, and technology are particularly susceptible. By flooding the market with fake shares, they create a smokescreen of misinformation, obscuring the truth about a company's health. A coordinated effort, involving sympathetic journalists publishing damning articles, can push these small companies to the brink of collapse. It's financial warfare in the shadows, and it's not just theory; it's a terrifying reality.

The result? The traditional life cycle of many companies, especially in the biotech sector, is disrupted and distorted. Angel funding, venture rounds, and public offerings are meant to fund research and development over years, yet this malicious manipulation can cut that journey short, robbing companies of their market value, and leaving the malefactors to walk away with the spoils.

Shedding Light on the Dark Corners: What Lies Ahead

You might think this all sounds too bizarre to be true, and I wouldn't blame you. But here's the rub: the SEC, which once dismissed these allegations as myth, has been forced to address the issue. They've introduced a regulation known as Regulation SHO, aiming to disclose companies experiencing excessive phantom shares. The SEC even conceded that they had to "grandfather" these fake shares already in the system, fearing the chaos that might ensue if they were removed.

It's a perplexing turn of events, and it's high time we pay attention. We're navigating a financial labyrinth where the lines between reality and illusion are blurred, where corporate democracy hangs by a thread, and where the very essence of capitalism is called into question. The power of any theory lies in its ability to make predictions, and when those predictions start coming true, it's time to unravel the mystery and demand answers. The question that lingers: how deep does this rabbit hole go, and what will we uncover when we finally shine a light on its darkest corners?