Naked Shorts at the Supreme Court

When you’re trading securities, you generally think about being regulated by the Securities and Exchange Commission and federal law. Should you be worried about state law, too? That question isn't merely theoretical, as shown by the naked short selling case that was argued Tuesday before the U.S. Supreme Court. The answer has practical consequences for traders of all kinds.

The case, Merrill Lynch v. Manning, arises from allegations by individual shareholders in Escala Group Inc., that traders at Merrill Lynch, Knight Equity Markets and UBS Securities, among others, engaged in naked short selling to manipulate the value of the stock. In essence, the original plaintiffs alleged that the traders made short sales without bothering to borrow the securities that would be needed to cover the trade.