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Comment by the_hangman | Hacker News Reader

> On or about December 2, 2010, Investor 1 [...] asked SHKRELI in an email about, inter alia, the fund's assets under management and the names of its independent auditor and fund administrator. SHKRELI told Investor 1 that MSMB Capital had $35 million in assets under management and that the fund's independent auditor and administrator were Rothstein, Kass & Company, P.C. and NAV Consulting Inc., respectively. At the time of this representation, MSMB Capital did not have an independent auditor or administrator, and SHKRELI had lost through trading the approximately $700,000 that had been invested by the four Capital Limited Partners. In fact, as of November 30, 2010, the value of assets in MSMB Capital's bank and brokerage accounts totaled approximately $700.

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It just keeps getting better (or worse, depending on if you invested with him)...

In addition to failing to settle a huge short position, he managed to turn $1.12 million into $58,500 in 28 days.

> Contrary to SHKRELI' s representations to Merrill Lynch, MSMB Capital had failed to locate OREX shares to borrow in order to settle MSMB Capital's short sales. As a result, MSMB Capital failed to settle a short position of over 11 million shares of OREX, which Merrill Lynch ultimately closed at a loss of over $7 million. In addition to the losses in the Merrill Lynch account, MSMB Capital suffered over $1 million in other trading losses in approximately February 2011. Based on these trading losses, the value of assets in MSMB Capital's bank and brokerage accounts, not including the OREX losses at Merrill Lynch, declined from more than $1.12 million on or about January 31, 2011 to $58,500 at the end of February 2011.

He's had a troubled past and was booted from a prior company.

He should legitimately claim affluenza and see how that works for his defense. At least there is legal precedent.

I found it funnier how they tried to short sell $1M of stock and somehow got $7M in the hole. Must have been some leverage on that deal :v

Actually that is very "easy" to do, first you short sell some stock (naked short) for $1M, then the stocks value goes up by $8M. You are asked to cover your short and even after your $1M you are still left holding $7M in liabilities.

This is incorrect. You can’t talk about absolute $8mill gain without talking about the total market cap (total value) of the stock. What would have happened that the company its not increase by $8mill but increase by 8 times the current value which is more possible to happen for small cap stocks.

If I sell something for $50 million and need to spend $58 million to cover, I'm down $8 million. There's no need for an 8x increase in valuation.

Yes agreed with your example. The total loss in your example is only 16%. In the example provided above he starts with $1mill and has a loss of $7 mill. Thats a 700% loss.

Umm, you know how short sales work right? You're borrowing shares to sell them at current prices and then have to return the shares later. If the price rises, you are out the difference between what you sold at and what you repurchase at for when the call to cover comes in.

From Wikipedia: "Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale." It is really easy to lose your shirt with a naked short.

Aka "unlimited downside".

From whom does one do this borrowing?

generally from your broker (who borrows them from their other clients who own those shares). there's some institutional lending also

Apologies for my complete ignorance -- but doesnt that sound super shady?

Look at the agreement you sign when opening a brokerage account. You give the brokerage firm the right to loan out any shares of stock you own. I believe this only happens in accounts that have margin (you do have to have a margin account to short), but I am not entirely certain.

Naked shorting doesn't do much to exacerbate the downside of shorting a security. Even if you have borrowed the security, you still have an unlimited downside (i.e. the stock price _can_ go to infinity).

Naked shorting is more of a systemic problem because you can put downward pressure on a stock even when the market is not willing to sell at the price you are pretending to sell at. It also makes it hard to keep track of voting shares and you can see many more votes than actual shares.

It's actually very easy to do that.

This scenario might be called a "short squeeze". If you can't actually borrow the stock which you've located before shorting - then you get "bought in" - and your broker will just buy shares at whatever price is necessary to cover.

Maybe he could launch a GoFundMe like that guy that lost $100K on E*trade shorting stocks. Although either he or GoFundMe at least had the good conscience to delete that campaign...

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