This has single handedly caused more companies to go bankrupt than anything else. Patrick Byrne has lead a campaign to stop this for the past number of years. He also writes a daily commentary on what the hedge funds are targeting to take down now. http://www.deepcapture.com/
investors, the real problem is not just that shorts target companies to beat down into oblivion, they do that..but, you can't eliminate shorting altogether, because it serves a useful purpose, and does provide liquidity to markets..but what has to be done now is to enforce laws vigorously against naked shorting..this is the problem..and everyone should write your congressman to remind the sec to actually enforce the laws already on the books..ie. catch a naked short artist, and prosecute him, make an example of a high profile hedge fund, not that hard to prove, and this behavior will cease..
I agree totally. Shorting stock has its place. But what these hedge funds are doing is borrowing stocks with the consent of the brokerage that don't exist. Sometimes the brokerage doesn't want to lose favor with a huge fund that may be its bread and butter. Phantom stocks are borrowed, way above the float in order to benefit the hedge funds that initiated the short knowing too well they will never be delivered. This is not limited to some rogue funds either. Something else happens in June 2006: a former SEC investigating attorney named Gary Aguirre writes an 18-page letter to Congress. If the contents of this letter are accurate - as they are later proven to be - this is the biggest scandal in the SEC’s seventy-plus years of operation.
Aguirre writes, “I believe our capital markets face growing risk from lightly or unregulated hedge funds just as our markets did in the 1920s from unregulated pools of money - then called syndicates, trusts or pools. Those unregulated pools were instrumental in delivering the 1929 Crash. …There is growing evidence that today’s pools-hedge funds-have advanced and refined the practice of manipulating and cheating other market participants.”
Aguirre then describes an investigation that he led at the SEC. “The investigation was two-pronged,” he writes. The first prong concerned allegations that the head of a major investment bank provided an illegal inside tip to a large hedge fund. “The second prong of the investigation…market manipulation…involved two classes of suspected violations: wash sales and naked shorts.”
That is, this investigator was investigating phantom stock sales by hedge funds.
He writes, “Some of my colleagues believed [the naked short] prong held a greater potential to severely injure the financial markets.”
Unfortunately, Aguirre continues, this investigation was “stopped in its tracks” because the investment banker in the insider trading prong had “political connections.” In later media stories, it is revealed that the investment banker was John Mack, head of Morgan Stanley. The hedge fund that Aguirre was investigating was called Pequot Capital. http://www.deepcapture.com/the-story-of-deep-capture-by-mark-mitchell/