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Developing Story Line: A Naked Short Covering Scheme
$NWBO When following a lawsuit it's interesting to see the different narratives put forth by the Defendant and Plaintiff. On the Plaintiff's side,
$NWBO has a developing narrative that the spoofing is being done to cover short positions established through naked shorting. I will explore this narrative further.
$NWBO's First Amended Complaint In
$NWBO's First Amended Complaint ("FAC) there was no explicit mention of naked shorting. [1] The FAC simply stated that spoofing schemes drove down the share price allowing Defendants to purchase shares at artificially lower prices. Id. I believe
$NWBO purposely kept any mention of naked shorting out of the FAC. Why?
$NWBO wanted to draft a complaint that could survive a motion to dismiss. In Harrington, allegations related to naked shorting were dismissed. The Court stated: "Without any specific factual allegation that any Defendant failed to deliver shares following a short sale, the Complaint fails to allege that abusive naked short selling took place. Instead, it merely alleges that short selling took place at high volumes, and that naked short selling may have taken place, neither of which is, by itself, manipulative." [2] Essentially, claims of naked shorting were not going to survive a motion to dismiss.
$NWBO's attorneys smartly kept any mention of naked shorting out of the FAC.
$NWBO's Opposition Brief to Defendants' MTD While
$NWBO's FAC avoided directly mentioning a naked short covering scheme, the subsequent filings spoke directly to this point. In Plaintiff's Memorandum of Law in Opposition to Defendants' Motion to Dismiss the Amended Complaint,
$NWBO stated: "And like here, the plaintiff alleged that defendants sought to benefit from their spoofing by obtaining shares at below-market prices in order to cover short positions established through a related alleged scheme of naked short selling." [3] (emphasis added) A Naked Short Covering Scheme
$NWBO is alleging a naked short covering scheme by Defendants. That begs the question, who is naked shorting? Broker-dealers are legally allowed to naked short for genuine market making activity. [4] The seven Defendants are broker dealers. Yet, two of the defendants, Lime and Instinet, claim to only trade on behalf of their clients. [5] The other five broker-dealers claim to trade on behalf of themselves and clients. Id. Hence, if NWBO's developing naked short covering storyline is true, there is likely some illegal actions being taken by, at minimum, the customers of Lime and Instinet, and likely the customers of all seven Defendants, not to mention the illegality being alleged against the broker-dealers in the FAC. We've seen information that these clients (usually hedge funds) take out substantial short positions on companies they believe will go bankrupt, thus never having to close out their short position. One such example is Melvin Capital. [6] Melvin Capital was a well known short/long hedge fund. From 2014-2020 they boasted annualized returns of 30%. Id. It appears a large percent of the Melvin Capital returns was related to their short positions. For example, in 2015 67% of returns came from its short positions. [7] In other words, the short positions of hedge funds can be significant. To that point, a great article by Larry Smith (
@SmithOnStocks1
) explores the potential substantial short position Melvin Capital had in GME. Mr. Smith came up with some reasonable scenarios where "Melvin shorted the entire company once or even twice over." [8] Mr. Smith went on to opine that Melvin "could not have shorted this number of shares by borrowing them in a legal shorting maneuver." Id. The interest expenses for legally shorting this number of shares would have been astronomical, but by naked shorting, there would be no interest expense. Id. Final Thoughts The amount of spoofing occurring with NWBO is staggering. Harrington is alleging approximately 30 spoofing incidents. [5]
$NWBO provided detailed information alleging a staggering 2,849 examples of spoofing. Id. Why are Defendants and/or their clients engaging in this sort of behavior?
$NWBO claims that they are engaged in a naked short covering scheme. Do we know for certain that Defendants and/or their clients are engaged in a short covering scheme? No. Yet, no one spoofs (illegal conduct) in a vacuum. There is likely a financial reason behind such behavior. We've seen reasonable speculation that Melvin Capital was holding a short position in GME that was one or two times the number of legitimate GME shares. That is just one hedge fund. It appears multiple hedge funds and multiple broker-dealers are engaged in a naked short covering scheme with
$NWBO. If
$NWBO's storyline is true, how many naked shorts remain in
$NWBO? This story is developing and if the lawsuit offers any additional insights on this point I'll be sure to let everyone know. [1]
https://cohenmilstein.com/sites/default/files/NWBO%20v.%20Canaccord%20Amend.%20Complaint-%2004102023.pdf
[2]
https://casetext.com/case/harrington-glob-opportunity-fund-v-cibc-world-mkts-corp [3]
https://storage.courtlistener.com/recap/gov.uscourts.nysd.590344/gov.uscourts.nysd.590344.123.0.pdf [4]
https://sec.gov/investor/pubs/regsho.htm [5] Docket #127,
https://courtlistener.com/docket/66579590/northwest-biotherapeutics-inc-v-canaccord-genuity-llc/ [6]
https://cnn.com/2022/05/19/investing/melvin-capital-hedge-fund-closes/index.html [7]
https://seekingalpha.com/news/3841116-the-rise-and-fall-of-melvin-capital-a-timeline [8]
https://smithonstocks.com/could-there-have-been-hundreds-of-millions-or-even-more-than-a-billion-counterfeit-shares-of-northwest-biotherapeutics-created-through-illegal-naked-shorting/
6:24 PM · Oct 4, 2023
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