In the dynamic landscape of financial markets, the practice of short selling, particularly its aggressive form known as naked short selling, has been a subject of intense debate. While short selling is a legitimate strategy where shares are borrowed and sold in anticipation of a price drop, naked short selling often veers into market manipulation, adversely affecting stock prices and investor confidence.

Understanding Short Selling and Its Impact

Short Selling Mechanics: The process involves borrowing stock shares, selling them at the current market price, and later repurchasing them at a lower price. This strategy, though legal, comes with unlimited risk and significant interest costs on borrowed stocks.

Predatory Short Selling: More aggressive and potentially manipulative, this practice disproportionately affects smaller entities, particularly in sectors like junior mining. It includes tactics like last-minute stock sales to manipulate closing prices, often leading to broader market repercussions.

Regulatory Responses and Market Evolution

In response to deceptive market practices, various regulatory bodies have stepped in:

• The Ontario Capital Markets Modernization Taskforce in Canada has recommended banning misleading statements about public companies.
• The removal of the “tick test” rule by IIROC and CSA has led to increased short selling activities, impacting junior markets and sparking calls for regulatory reforms.

Case Studies and Legal Developments

Power Nickel Inc. (TSXV: PNPN | OTCQB: PNPNF): Planning to file a complaint about potential illegal short selling of its shares, highlighting market imbalances and suspected naked short selling.

Federal District Court Ruling: A recent U.S. ruling emphasized the responsibility of broker-dealers in preventing manipulative trading, signaling a shift towards stricter regulation.

The Risks of Naked Short Selling

Naked short selling, where shares are sold without being borrowed or confirmed to exist, is illegal but persists due to regulatory loopholes. This practice claims to provide liquidity in options markets but can lead to exploitative practices and market manipulation.

The Role of Financial Institutions and Regulatory Gaps

Financial institutions and broker-dealers often play a crucial role in facilitating illegal naked short selling. Recent legal developments have highlighted their accountability in preventing such practices, marking a significant step towards protecting retail investors from fraud.

Call for Action

Save Canadian Mining, a movement advocating for fair market rules, urges the Canadian Securities Administrators (CSA) and the Investment Industry Regulatory Organization of Canada (IIROC) to re-evaluate the re-institution of the tick test to safeguard Canada’s junior markets. They argue that the lack of this rule has been detrimental to the market’s integrity and fairness.

Conclusion

The complexities of predatory and naked short selling present significant ethical dilemmas in finance. These practices, while potentially profitable, often lead to market manipulation and unfair trading scenarios. Traders and investors need to approach these strategies with caution, understanding the inherent risks and ethical considerations. This comprehensive exploration, enriched with expert insights, underscores the importance of informed, ethical trading in today’s financial markets.

This article aims to shed light on the intricate and often controversial world of short selling, particularly its more manipulative forms. It highlights the need for vigilant regulation and ethical practices in the financial markets to ensure fair and transparent trading.

In this InvestorIntel interview, host Tracy Weslosky brings together Power Nickel Inc.‘s (TSXV: PNPN | OTCQB: CMETF) CEO Terry Lynch and Founder of Save Canadian Mining, a movement to stop predatory short selling, along with compliance expert and CBLT Inc.’s (TSXV: CBLT) President, CEO, and Director Peter Clausi to debate about whether the recently released IIROC (the Investment Industry Regulatory Organization of Canada) guidance on short selling has any teeth and will have any effect on short sellers or brokerage houses.

IIROC’s August 17, 2022 Guidance Note sets out the rule that a short seller must have a “reasonable expectation” that sufficient shares will be available to settle any resulting trade on settlement date. As Terry Lynch and Peter Clausi point out, this is not a new rule, but a restatement of a current prohibition under UMIR 2.2 – Manipulative and Deceptive Activities.

In the debate, which can also be viewed in full on the InvestorIntel YouTube channel (click here), Terry tells Tracy that the IIROC statement “has the potential to be big news,” because “the problem was it wasn’t well understood by the major investment banks, and so they didn’t adhere to the practices. So now I think IIROC has clarified this once and for all and has clearly moved the liability away from from them and onto the people that don’t follow the rules.”

Peter and Terry both agree that the recent IIROC guidance has shifted the responsibility for covering short selling from the individual investors to the brokerage houses who have to have a “reasonable expectation” that sufficient shares will be available to settle any resulting trade, but Peter Clausi points out that the IIROC guidance doesn’t itself prohibit naked short selling, which is a major problem in the market. He also points out that there is tremendous wiggle room in the words “reasonable expectation” used by IIROC to make enforcement difficult, and in reality protects brokerage houses from prosecution.

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About Power Nickel Inc.

Power Nickel is a Canadian junior exploration company focusing on high-potential copper, gold, and battery metal prospects in Canada and Chile.

Power Nickel is the 100-per-cent owner of five properties comprising over 50,000 acres strategically located in the prolific iron-oxide-copper-gold belt of northern Chile. It also owns a 3-per-cent NSR royalty interest on any future production from the Copaquire copper-molybdenum deposit, recently sold to a subsidiary of Teck resources Inc. Under the terms of the sale agreement, Teck has the right to acquire one-third of the 3-per-cent NSR for $3-million at any time. The Copaquire property borders Teck’s producing Quebrada Blanca copper mine in Chile’s first region.

To learn more about Power Nickel Inc., click here

About CBLT Inc.

CBLT Inc. is a Canadian mineral exploration company with a proven leadership team, targeting lithium, cobalt and gold in reliable mining jurisdictions. CBLT is well-poised to deliver real value to its shareholders.

To learn more about CBLT Inc., click here

Disclaimer: Power Nickel Inc. and CBLT Inc. are advertorial members of InvestorIntel Corp.

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In this InvestorIntel interview, host Tracy Weslosky is joined by Terry Lynch, Founder of Save Canadian Mining and CEO of Power Nickel Inc. (TSXV: PNPN | OTCQB: CMETF), and Peter Clausi, President, CEO and Director of CBLT Inc. (TSXV: CBLT) to discuss predatory short selling and how it is hurting investors and the mining industry.

In the interview, which can also be viewed in full on the InvestorIntel YouTube channel (click here), Terry and Peter talk about how the lack of fair and transparent capital markets allows predatory short sellers to go unpunished and play havoc in the markets with the interests of investors and companies alike. Terry goes on to discuss the need for reinstatement of the “tick test” to curb predatory short selling. Touching upon the lack of response from the Canadian regulators, Peter advocates the need for stronger investigative powers by the Canadian Securities Administrators to correct a flawed system that keeps stock values artificially down.

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About Save Canadian Mining

Save Canadian Mining is a not-for-profit, issue-based advocacy group representing the interests of Canada’s junior mining industry and the investment community. Founded in September 2019 by Terry Lynch, Save Canadian Mining is committed to working with governments and agencies to amend regulations in capital markets to help generate investment in Canada’s junior mining industry.