Five years ago, Overstock filed a naked-shorting case in California against a bunch of Wall Street firms. The gist of the accusation was that they had conspired with clients to manipulate short sales of the company’s shares in order to allow more shorting (and thus generate bigger brokerage fees) than would otherwise have been possible. The effect, Overstock alleges, was to depress its share price.
Most of the defendants settled for undisclosed sums, leaving just Goldman Sachs and Merrill Lynch (now part of Bank of America) in the cross-hairs.
There is much more at stake than the amount of damages Overstock was claiming, thought to be $55m.
http://www.economist.com/...
My bold imagine how much this could effect a much bigger company like FaceBook?
Shorting stocks is not illegal so whats the big deal?
Nakid shorting stocks is illegal and Goldman Sachs has done it in the past and we have no evidence they are doing it now.
What is Nakid shorting stocks?
What matters here is the technical issue of how you borrow the stock. Typically, if you’re a hedge fund and you want to short a company, you go to some big-shot investment bank like Goldman or Morgan Stanley and place the order. They then go out into the world, find the shares of the stock you want to short, borrow them for you, then physically settle the trade later.
But sometimes it’s not easy to find those shares to borrow. Sometimes the shares are controlled by investors who might have no interest in lending them out. Sometimes there’s such scarcity of borrowable shares that banks/brokers like Goldman have to pay a fee just to borrow the stock.
These hard-to-borrow stocks, stocks that cost money to borrow, are called negative rebate stocks. In some cases, these negative rebate stocks cost so much just to borrow that a short-seller would need to see a real price drop of 35 percent in the stock just to break even. So how do you short a stock when you can’t find shares to borrow? Well, one solution is, you don’t even bother to borrow them. And then, when the trade is done, you don’t bother to deliver them. You just do the trade anyway without physically locating the stock.
http://www.rollingstone.com/...
My bold so Goldman Sachs sells shorts on stocks they do not own this is fraud!
Why should FaceBook worry about this because demand for real stocks to be shorted would push up the price of their stock assuming that people were buying short shares from people who actually owned the stock.
That and the hedgefund vultures are already circling to buy shorts from Goldman Sachs.
A prime broker at one of the top underwriters of the IPO said the firm would not be lending shares, at least until the initial settlement in three business days.
"I don't know how many shares will be available for shorting," said the broker, who requested anonymity. "We would only provide them once the deal has stabilized."
The bigger-than-usual percentage of retail-investor ownership of the shares may make shorting more difficult, as those investors don't tend to lend their shares for those who want to take a short bet.
"It will likely be difficult to get shares to borrow," said Adam Reed, professor of finance at UNC Kenan-Flagler Business School in Chapel Hill, North Carolina.
"I'm doing the legwork now and calling all the brokers," said a hedge fund manager late on Thursday, after Facebook priced its IPO at $38 per share. "Goldman and Credit Suisse are our prime brokers, so I am in contact with them about this
."
http://www.reuters.com/...
Overstock claimed damages of $55 million dollars Facebook is how much bigger and is already having trouble maintaining its stock price on the first day of its IPO.
Everyone I am sure wants to short the stock now. But Goldman Sachs as far as we know has not stopped selling fake Nakid shorts.
In my opinion Facebook should sue. Since I am unemployed I would like 1% of the damages or out of court settlement if Facebook should act on my idea.
Update
On Wednesday, the company announced that longtime investors led by Goldman Sachs planned to sell big chunks of their holdings in the IPO. That struck some investors as greedy and a sign that Wall Street insiders were getting out while they could.
"There was a lot of smart money dumping it," said Barry Ritholtz, chief executive of research firm Fusion IQ.
http://www.latimes.com/...
If Goldman was an inside investor before Facebook went public and it turns out they are doing nakid short sales of Facebook then we got conflict of interest issues as well as fraud.