Naked Short Selling: Wall Street Wins, You Lose

-By Mark Faulk 

Last month, I gave what was, hopefully at least, an understandable overview of a decades-long  Wall Street scam called naked short selling, which made headlines in the aftermath of the 2008 economic collapse as major Wall Street firms claimed to be harmed (some driven into bankruptcy) by unscrupulous traders flooding the market with electronic counterfeit shares of bank stocks, artificially driving down the share prices.

Then, in early 2021, naked short selling made national headlines again when a group of retail investors on Reddit teamed up to create a buying frenzy in the stock of GameStop (NYSE: GME), which had somehow had 140% of its stock shorted, meaning short sellers had “borrowed” and sold 40% more GameStop stock than even existed. 

So the question becomes: if this has been documented as going on for well over two decades, costing retail investors hundreds of billions or even trillions of dollars, why hasn’t the SEC or Congress stepped in to put a halt to it? 

The reality is that those same Wall Street firms who were crying victim were themselves the primary predators who destroyed as many as a thousand companies and wiped out the savings of a generation utilizing the same illegal practice in the decade leading up to the 2008 meltdown. Once the banks and brokers were rescued by the SEC’s uncharacteristic swift action to protect them against unscrupulous trading, and then bailed out by taxpayers, they then wielded their enormous power to once again kill any meaningful reform and enforcement of naked short selling. In other words, they went from predator to victim, and then, saved from their own nefarious schemes by regulators and taxpayers, back to predator again. 

In 2005, the late John Harmer, former Lieutenant Governor and California Attorney General under Ronald Reagan, worked with then U.S. Senator Bob Bennett and others to try to rein in naked short selling but hit a stone wall erected by Wall Street and their broker owned trading entity the Depository Trust Clearing Corporation. He described his conversations with then SEC Chairman William Donaldson in the 2012 documentary The Wall Street Conspiracy, “He was contemptuous, ‘you people shouldn’t meddle in this, you don’t really know what you’re getting into, leave it to us,’…the members of the Black Priesthood if you will…’to take care of it.’”

So here we are, over two decades after grassroots efforts to clean up Wall Street were stymied by the most powerful people in the world, and still naked short selling in all its incarnations and mutations is systemically robbing millions of Americans of their retirement funds and life savings. 

Attorney Wes Christian, who has spent the past two decades representing companies harmed or even destroyed by naked short selling, said “Wall Street used to make money by taking companies public and doing things to build the companies up. They had a great moral purpose and a great human purpose, and a role in society that helped people who are inventors or who wanted to help grow technology,”

But the last two to three decades has changed that. According to Christian, “Where we are today is Wall Street is still rigging the market. They don’t really care what happens or what the residual effect is to their actions, they just want to make the money. Wall Street has changed its mantra, it’s changed its goal in life. Its goal in life currently is to take risk-less bets and do it with other people’s money, whether it’s their own clients or whether it’s the pension funds of America. 

Under the new Chairman Gary Gensler, the SEC has shown signs of taking a more aggressive stance against Wall Street fraud, so there is some hope for the future. But in the meantime, what can \the average investor do to protect themselves from predatory naked short selling?

“The first thing is, take your shares out of a margin account,” advises Wes Christian. “Don’t let them borrow against your shares, because that’s what gives them the legal right to loan your shares to short sellers. Secondly, keep your shares in a cash account where they can’t legally take your shares and use them against you to drive down the value of your portfolio.”

In the same way that GameStop investors teamed up to fight back against predatory hedge funds, investors have to join together to collectively protect their investments against rampant market fraud. 

The sequel to The Wall Street Conspiracy, entitled The Wall Street Conspiracy ll: Down the Rabbit Hole, produced by Kristina Leigh Copeland, Joanie Klar, and Mark Faulk, is currently in pre-production. 

(contribute at www.wallstreetconspiracyrabbithole.com)

Mark Faulk is a longtime social justice activist, author, and filmmaker. He was the writer and field director for The Wall Street Conspiracy and is the author of The Naked Truth: Investing in the Stock Play of a Lifetime. He is currently at work on the docuseries Voices in a Jailhouse, due to be completed by spring 2023.