Abort the Short!

Patrick Byrne: “I’ve been pouring kerosene on myself and setting myself on fire because naked short selling .. is destroying American entrepreneurship.”

Yet another basic backgrounder, profiling yet another Cassandra in the tragedy of “naked short selling”  — though for some reason it appears in the Latin America section of Bloomberg’s Web site.

When Movie Gallery’s stock crashed on Feb. 3, short sellers sold almost 750,000 shares, or 11 percent of the shares traded that day, according to short-sale records compiled by Nasdaq.

Daily short sales averaged almost 370,000 shares over the first eight days of February, up from 70,000 on Jan. 31, while the stock plunged 36 percent to $3.47 from $5.45. As the stock was falling, a growing number of sellers weren’t delivering shares to buyers, a warning sign under SEC rules of possible naked short selling.

Nasdaq put Movie Gallery on its list of companies at risk of manipulation because from trades through Feb. 8, those undelivered shares topped 160,000, or 0.5 percent of Movie Gallery’s total shares. When companies surpass that threshold, SEC rules impose restrictions on further short selling.

Patrick Byrne, chief executive officer of Salt Lake City- based Overstock.com, has been the most vocal executive charging that abusive short-selling schemes are draining the lifeblood from many companies.

I’ve been pouring kerosene on myself and setting myself on fire because I think there are global, systematic issues with naked short selling,” Byrne, 43, says. “It’s warping the market price of some small-cap companies and destroying American entrepreneurship.”

As of July 10, Overstock.com had been on Nasdaq’s list of potential naked-short-selling targets every day since April 22, 2005, and its shares had fallen 45 percent over that period.

‘It’s a Nonissue’

Investors who specialize in selling short say naked shorting is rare and complaints from supposed victims are overblown. “The phrase I would use would be red herring,” says Jim Chanos, 48, who runs Kynikos Associates Ltd., a New York-based hedge fund firm known for short selling.

He says he’s never used naked short selling as a technique. “It sounds ominous, it sounds nefarious and, by and large, it’s a nonissue in the marketplace,” he says.

There’s some equivocation in those dueling quotes about what “naked” actually means. [tktktktktk]