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Tons of misunderstanding here.

Short selling is not illegal, but failing to cover is. The SEC gives you three days to borrow the stock you’ve sold short, but there is no mechanism in place to enforce this. This allows “groups” of people to sell huge amounts of stock they DO NOT OWN, AND WILL NEVER BE ABLR TO BORROW!

When there is a short attack on a company, first this group plants a fake story - like, for instance, a company is about to be investigated for accounting discrepancies. This rumor gives them cover.

Then they start to sell, and the price starts to drop. When it gets low enough, legal investors take a look a think the stock is oversold, so they start to buy. Normally, this would put an end to the selling and the stock would stabilize at a level the free market decides it should be.

But with naked short selling, the attack continues. While the buyers are moving in, the short sellers are continuing to dump shares that they DO NOT OWN AND CANNOT BORROW. This overwhelms the market for the target company - so it continues to drop precipitously. After a while, average investors like you and I start to panic. We can stand a price drop - even a big price drop - but this is a free fall. we ask ourselves why, and the only thing we can find is this rumor about an investigation into the company’s accounting practices.

With the stock falling so fast, we think the rumor MUST BE TRUE! so we sell, putting further downward pressure on the poor company’s stock.

Now you all know how a legitimate short seller makes money, right? He thinks the price of a stock is too high. He doesn’t have to own it, he just has to think the stock is overbought and ready to correct, that is, move down in price. Let’s say the stock is selling for $100, and he short sells one share that he doesn’t have. The broker LENDS him the one share, sells the share for him, and puts $100 in the short sellers account. Now the ss has one hundred bucks, but still owes the broker one share.

Eventually, the short seller is proven correct and the stock drops down to $90. Using the $100 he received for selling the share he borrowed, he purchases the one shar, returns it to the broker, and keeps the $10 profit. Simple, right?

But with naked short selling, he is selling more shares than the broker can lend him - this is naked short selling.

It is the ANTITHESIS of free markets - it is manipulation in its worst and most greedy form. It kills the small investor, and kills the companies upon which it preys. And since it is almost impossible to regulate, the only way to stop it right now is to stop all short selling.

I have posted many times about NSS and recommended visiting the site Deep Capture, by Ptrick Byrne, CEO of Overstock.com, a company that was victimized by a short sale attack.

Read and understand. Naked short selling is an attack on our economy, no less dangerous than a terrorist attack on Wall Street.

Here’s his latest missive:

Overstock CEO Patrick Byrne Comments on SEC’s New Rules Against Naked Short Selling

‘Still no penalties for financial rapists’ declares Byrne

SALT LAKE CITY, Sept 17, 2008 /PRNewswire-FirstCall via COMTEX/ —

Overstock.com, Inc. (OSTK) chairman and CEO Patrick M. Byrne comments on the SEC’s September 17, 2008 press release (see ) that purports to protect investors against naked short selling.

Dr. Byrne commented, “At the core of the SEC announcement is a decision that if a hedge fund naked shorts a stock, its broker isn’t supposed to let them naked short again. But guess what: they were not supposed to naked short in the first place. Instead of giving the buyer who receives the fail to deliver the right to put it back to the naked short selling participant, the SEC once again opts for no penalties for financial rapists.

“If the SEC were anything but a hedge fund bootlick,” continued Byrne, “it would not have taken the half-measure of a pre-borrow requirement applied only as a penalty for those failing to deliver within T+3, but would have instituted a market-wide pre-borrow requirement (as it did in its July 15, 2008 Emergency Order protecting Upper Caste financial firms), and mandatory buy-ins at T+3.

“Some questions for the SEC:

1. How will the SEC determine whether an institution is in compliance with this rule? The only way to determine compliance is through an SEC audit, something that could only occur months after the fact. In the case of a bear raid, that will be too late.

2. Where is the ‘buy-in’ requirement? Under the new SEC rules a crooked hedge fund can still naked short sell without settlement and keep that short open indefinitely. It appears that only future naked short sales will require a pre-borrow and that there is still no closeout requirement for failed trades.

3. What of manipulative day trading? Chairman Cox has admitted that the financial stocks did not have a significant level of naked shorts, but rather collapsed under day trading activities. The new rule fails to address this, the very activity that generated the need for the July 15, 2008 emergency order. The manipulative day trading short seller never has a position open for three days. However, under the new rules, he can still use a single locate multiple times to create the best leverage possible to drive natural investors out of the market.

4. Where are the penalties? Without meaningful penalties, these rules have no bite. The SEC needs to make sure that the rules are strictly and aggressively enforced — both for failures to deliver that occur within the CNS system and outside the CNS system in ex-clearing trades, where, I suspect, there is naked shorting that makes the object of current SEC concerns look like small potatoes.

“Rule 10b-21, the short selling anti-fraud rule, is a carefully contrived joke. It moves from a low-penalty too-vague-to-enforce rule, to a high-penalty too-vague-to-enforce rule. Without strict and aggressive SEC enforcement (for which the SEC has zero demonstrated record) it will be just more lines of meaningless pabulum in the Federal Register.

“On the bright side, the SEC has eliminated a major loophole in Regulation SHO, the options market maker exception. There was never a good reason why options market makers should have been allowed to naked short and fail to deliver in perpetuity. For taking this long overdue action, I applaud the SEC.

“What is needed is a Congressional investigation into the abortion that is our nation’s stock settlement system, focusing especially on the DTCC. A healthy next step would be to unplug the SEC and move its functions into the DOJ.”