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The practice I'm referring to is "naked shorting" which has been illegal since 2008 in the US.

Except you're completely conflating terms and numbers here. A stock can have over 100% short interest with no naked shorting occurring. >100% short interest DOES NOT imply that there is naked shorting.

It doesn't guarantee that it's occurring, but it's strong indicator that something sketchy is happening.

In this case, the important point is that a hedge fund with a 140% short position is more vulnerable to loss than a hedge fund with a 100% short position.

> In this case, the important point is that a hedge fund with a 140% short position is more vulnerable to loss than a hedge fund with a 100% short position.

Sure, but only in the sense that a fund is also more vulnerable to loss at 80% short than 40% short. Nothing magic happens between 99% and 101% short.

See this comment for why you can have >100% short interest without naked shorting: https://news.ycombinator.com/item?id=25991013

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