Monday, November 30, 2009

Naked Short-Selling - Stock Counterfeiting

When most people think of counterfeiting, printing off your own money comes to mind and handing it over to an unsuspecting bank teller comes to mind. In reality, all sorts of things are subject to counterfeiting law, and money is involved in only a small part of the counterfeiting charges laid. Naked short-selling is also known as stock counterfeiting - today we explore the stock practices that may require the services of a criminal lawyer.

In decades past, stock counterfeiting had to be done with paper and ink, and a dab hand at forging signatures. Now that electronic means of administering the stock market dominate, it is actually much easier to counterfeit stock. This is a common method that Florida criminal lawyers see.

Naked Short Selling
There is a three-day leeway between the payment of a stock by the buyer, and its delivery by the broker. The money is paid, a Securities Entitlement for the amount of stocks purchased is put into the buyer's account, and the broker collects his commission. However if the stocks aren’t available, on day 3 the broker is supposed to remove the Securities Entitlement from the buyer's account and refund the commission and the purchase price. Simply failing to do this, and acting as if the Securities Entitlement is real and valid, is known as naked short selling.

Relatively common -- but illegal
Obviously, this is a form of fraud and theft, and as such is illegal practice. However, many brokers continue to do it, because if the buyer wants to onsell those stocks, they can hardly be told at the point of sale that they aren’t real. Another unwitting buyer is dragged into the loop, and while there is no loss on the broker/trader side of the fence, there is plenty on the investor side.

Investors protecting themselves
Investors would become subject to criminal charges also if they onsold this stock - a situation that most would consider extremely unfair. However, in some cases courts have determined that the original buyer (and attempted seller) is at fault, because of a lack of due diligence on their part. To avoid needing a Florida criminal attorney for an act you had no idea was wrong, always check for a corresponding book-entry share in the DTC's ledger.

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