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Comment by sokoloff | Hacker News Reader

But the shorts have created additional shares (and therefore additional proportions of fines). If there are 100 shares of a company outstanding and the company is fined $1M, each shareholder owes $10K to cover the fine.

Now, in a world where someone has shorted 10 shares, there are now 110 shares held long, meaning the total fines paid would be $1.1M, leaving $0.1M available to pay to the shorts.

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Shorts do not create shares that way; they're shares that have been borrowed, which means they've temporarily changed hands. Consider for voting. If you've borrowed shares from someone else over the time period that determines voting rights, only one of you gets to actually vote - you haven't magically created new votes in the process.

The shares are borrowed, but not always with the knowledge of the original shareholder. So should one owner get excluded from the fine just because their broker happened to loan out their shares and not the shares of another equally eligible holder? Opposite thing happens with dividends and the original holder is still entitled to those.

(And the original holder is due the dividends because the short is required to pay the dividends.)

My point about proportion of holdings is that if a company is fined $1M to the shareholders and there are 1,000 voting shares held, not every holder is holding 1. Some are holding more than 1. Some are holding 400 or more. So the formula would be:

owed = ($1M / total_voting_shares) * (holding_shares / total_voting_shares)

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