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Short selling: No defence

The UK has fewer remedies against the abuse of short selling by hedge funds than the US.

(This article appears courtesy of International Financial Law Review, sign up for a free trial on their site

The misuse of short selling by US hedge fund managers has recently been the subject of much scrutiny. The practice involves one party borrowing shares for a small fee, selling them, repurchasing them once the price has fallen in value, returning them to the original owner and making a profit on the difference between the sell and buy price. If the shares are not in fact borrowed in the first place, this is known as naked short selling. Although short selling is legal, naked short selling is considered to be improper and potentially illegal in the US, as federal securities law requires a stock to be borrowed (if not owned) before it can be shorted. The allegedly unlawful use of naked shorting by certain hedge fund managers has led to both regulatory enforcement action by the Securities and Exchange Commission and private law suits.

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