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First of all, the descriptor ‘naked shorting’ is not even used by the SEC in any legal regulatory documents. Yes they are now using this descriptor in the press and in comments. But it not legally defined anywhere. They discuss what it is but they have not made a legal definition accessible.

The SEC refers to a 3-day rule to locate a stock that has been sold short. They do not in any setting say that the practice of selling shares that don’t exist is LEGAL.

Let’s repeat that statement. THEY DO NOT SAY THAT THE PRACTICE OF SELLING NONEXISTENT SHARES IS LEGAL.

The SEC must assume that all shares sold short are registered shares that exist.

The practice of not locating shares is not the same as naked shorting. An analogy would be using my ATM card for a purchase not knowing that my spouse has just used it and there is not enough in the account. The transaction is not abusive and the bank may allow the transaction but with a penalty. In the SEC’s case there is no penalty.

What the SEC has done is to admit that ‘naked shorting’ exists. Naked shorting is not defined into two categories as abusive or nonabusive. There is no legal definition one way or the other. They are using the phrase ‘naked shorting’ without first defining what it is. The reason they don’t define it is because they know it will lead to lawsuits. So instead they have decided to use it without legal definition and to obscure its usage with ‘abusive’ versus something else.

So do not try to obsure the meanings of what we are talking about here. It is true that a brokerage may allow shares to be sold without first locating them as long as they have an understanding that the shares do in fact exist or can be borrowed from another brokerage if need be. But this is not the same as naked shorting. Naked shorting is where the brokers allow their hedge funds to sell whatever amounts of stock they wish regardless of whether the stock exists or not.

There is no such thing as legal naked shorting. Either the stock exists or it does not. If a broker knows the stock exists but does not precisely locate it, that is not naked shorting. If they allow a hedge fund to short whatever amount without limitation, that is naked shorting. The Ibanks are guilty of the latter.

Smart brokers have seen this scandal coming and they go out of their way to locate stock before allowing it to be sold short.

But the idea that ‘naked shorting’ is legal in any sense is a smoke screen. They won’t get away with it and we will see the SEC dismantled and replaced with an updated enforcement body that is not operating as if it were the 1930s. This new body will be established under the McCain-Palin administration. To confirm it just take a look at the recent Palin interview with Hannity.