It wasn’t long ago when they were saying that naked short selling never happened. They said it simply did not exist, that only wild-eyed conspiracy theorists believed in naked short selling. That was before 2008, when the CEOs of some big banks started hollering that naked short selling was causing the stock prices of their banks to nosedive. With the CEOs of the big banks hollering, the SEC, in June, 2008, issued an Emergency Order banning naked short selling (that previously did not exist) in the stocks of 19 big financial institutions (i.e. the financial institutions that were doing the naked short selling—to each other). But the SEC did nothing about the naked short selling of other stocks because, apparently, that naked short selling existed only in the fevered imaginations of people who believed that their savings were being wiped out by little green men.

Then, in August 2008,  the SEC lifted its Emergency Order banning naked short selling of stock in the 19 big financial institutions, and those financial institutions began naked short selling each other again. Their stocks (which had increased in value while the Emergency Order was in place) once again nosedived, and one of them, Lehman Brothers, saw its stock go into a classic death spiral (i.e. a spiral that caused death). Almost immediately after Lehman collapsed, the SEC issued another Emergency Order, this time banning all short selling in financial stocks, and in this new Emergency Order, the SEC stated in plain English that naked short selling can cause stocks to go into death spirals, making it difficult for the targeted companies to raise new capital, and thereby result in bankruptcy. Which, of course, was what had just happened to Lehman, as the SEC knew full well.

Some weeks later, the SEC lifted that Emergency Order and put into effect some new rules governing naked short selling. Ever since, the SEC has maintained that naked short selling rarely occurs, and it certainly has never sanctioned anyone for the naked short selling that (according to the SEC) created an “emergency” in 2008. So once again, the conventional wisdom is that only wild-eyed conspiracy theorists believe that naked short selling occurs, and only UFO abductees with tin foil hats believe that naked short selling occurs in massive volumes, causing damage to the markets.

It has long since been forgotten that CEOs of big banks were, back in 2008, hollering that naked short selling had caused their stock prices to nosedive, and it has long been forgotten that the SEC issued two Emergency Orders in 2008 to save the banks from naked short selling, suggesting in one of those Emergency Orders that naked short selling had contributed to the collapse of Lehman Brothers. And now we know why it has been forgotten. Now we know why the term “naked short selling” has once again been scrubbed entirely from the public discourse in quite Orwellian fashion. It is, of course, because the big banks are still perpetrating (with the full connivance of the SEC, whose data says it isn’t happening) massive volumes of naked short selling. This, anyway, is what we can conclude from a recent FINRA settlement.

FINRA, for those who don’t know, is the Financial Industry Regulatory Authority, which sounds like a government regulatory agency, though it is owned and operated by Wall Street, and its activities as a “Regulatory Authority” amount mostly to leveling small fines for massive crimes perpetrated by Wall Street, thereby relieving the SEC of any need to do its job. If  FINRA has issued a “settlement”  letter to a perpetrator, the issue is “settled” so far as the SEC is concerned, and such was the case when FINRA recently issued a “settlement” letter asking the big investment bank UBS to pay a small fine for violating the rules against naked short selling that the SEC isn’t enforcing.

More precisely, FINRA’s recent “settlement” letter (which you can read here) asked UBS to pay a fine for “not admitting or denying” having “entered tens of millions of proprietary and customer short sale orders without having reasonable grounds to believe that the securities could be borrowed and available for delivery.” When a brokerage sells stock short “without having reasonable grounds to believe that the securities could be borrowed for delivery” that means the brokerage has deliberately engaged in naked short selling (i.e. selling phantom stock that increases supply, driving down prices), and in this case it appears that UBS (between the years 2004 and 2010, according to FINRA) transacted naked short selling to the tune of “tens of millions”(emphasis added) of phantom shares in nobody knows how many companies were affected by this massive deluge.

In fact, UBS might have naked shorted far more than tens of millions of shares, though for some mysterious reason, FINRA reports that it doesn’t actually know how many additional shares were naked shorted. In its settlement letter, FINRA simply reported that aside from the “tens of millions” that were naked shorted, UBS “effected an additional significant but unquantifiable number of short sales without valid locates [i.e. naked short sales] during the Relevant Period.” Unquantifiable? As in too big a number for a calculator to handle? Or is it some smaller but still unpalatable number that FINRA’s ”regulators” dare not speak (or regulate)?

In any event, FINRA did report (or, rather, understate) the obvious fact that the “duration, scope and volume of the trading [i.e. a volume of naked short selling that is ‘unquantifiable’ but significantly more than “tens of millions’ of shares naked shorted] created a potential for harm to the integrity to the market.”

In fact, UBS at least “created a potential” to crash the markets by flagrantly violating the SEC’s supposed naked short selling regulations, and FINRA is asking UBS to pay a small fine (without admitting or denying what it did) so that the SEC can take no action whatsoever. Meanwhile, of course, the captured media continues to pretend that naked short selling (i.e. a criminal conspiracy) exists only in the minds of “conspiracy theorists” (i.e. people in our brave new world who are are crazy because they speak the truth).

One of the great episodes of The Simpsons follows Homer as he comes to realize that not all Springfield citizens are treated equally.

The difference, Homer eventually discovers, is membership in a secret society known as the Stonecutters. Once on the inside, Homer is delighted to find his new affiliation subjects him to an enviable set of alternate rules.

Obviously, this is parody, but it succeeds because it’s based on a truth to which we can all relate: the belief that status bestows disproportionate advantage upon a privileged few – up to and including license to engage in illegal behavior.

Homer and the Stonecutters immediately came to mind upon learning that, from 2005 through 2009, Deutsche Bank (NYSE:DB) selectively disabled a system intended to block customers’ short sale orders when placed without valid locates, while the Fidelity-affiliated National Financial Securities (NFS) achieved the same end by creating an entirely separate system for certain customers disinterested in compliance with the rules governing how the rest of us can trade.

Shorting shares that have neither been borrowed nor, at a minimum, located for eventual borrowing, is an illegal and manipulative practice and the essence of naked short selling; and yet, Deutsche Bank and NFS decided certain customers were entitled to do it.

Back in 2006, small-time hedge fund manager Jeff Matthews announced he doubted naked shorting was possible because he didn’t know how to do it. In reality, the thing Matthews didn’t know (possibly to his credit) was the secret knock used to gain entrance to the mega-hedge fund speakeasy, where the real debauchery goes on.

Why should Matthews and others be excluded?

The better question is: why should anybody be included? I suspect the clients allowed to violate the law in this way also happened to be the ones paying Deutsche Bank and NFS the most in commissions. But this isn’t like a hotel claiming it’s full while holding a suite in reserve for someone more important than you, or NBA refs not calling traveling on the players everybody’s really paying to watch. Instead, when these two banks enabled such manipulative trading, they were silently transferring wealth from the masses into the accounts of the privileged few.

This is true of both long buyers and short sellers, for the longs saw their investments devalued by the naked shorting of stocks in their portfolios, while the shorts were forced to pay high premiums for hard-to-borrow stocks even as others were exempted from such inconvenient market forces as supply and demand. This happened across the market, but those who should be particularly bothered are the many Deutsche Bank and NFS account holders whose brokerages acted contrary to their best interests.

In fact, they ought to sue, in my opinion, to say nothing of what the Department of Justice ought to be doing about it.

Exactly how much did these years of market manipulation extract from investors? That’s impossible to know, however what I can say without doubt that it exceeds the combined $925,000 fine imposed by FINRA.