BusinessTN

When Nick Plessas decided to take Green Dolphin Systems Corp. public about a year ago, he had no idea that his plan to grow the four-year-old environmental solutions company would land it right in the middle of a major Wall Street problem.

Plessas counts Powell-based Green Dolphin among thousands of companies struggling with the same issue—naked short selling and the deflation of share prices that results. Saying he finds the subject confusing and wonders why regulatory bodies allow the “serious criminal activity” to happen, Plessas explains naked shorting by equating it to counterfeiting money.

Naked shorting differs from legitimate short selling, in which shares are borrowed and sold in hopes of being repurchased later at a lower price. Selling shares without actually borrowing them first is naked shorting—no stock is available for transfer to the buyer because no stock was borrowed from the system to “cover” the short.

Some of the largest brokerage houses have been accused of naked shorting, and in late October, the Securities and Exchange Commission proposed a rule requiring short sellers to locate securities to borrow before selling.

As the year progressed, Plessas says he started to notice irregular trading activity of Green Dolphin shares, which have traded the past year between six and 80 cents.

“For example, we would see an 18-cent trade that, in a split second, would go to 17 cents,” says Plessas, the majority owner.

In late September, three different people called Plessas, each wanting to buy three million shares—a huge amount for a company with fewer than 22 million shares outstanding. Plessas suspects these people were the same naked short-sellers who are hurting Green Dolphin’s stock.

He has consulted a securities lawyer and even hired a private investigator with experience in securities, but Plessas says he hasn’t yet proved illegal activity.

In addition to turning down the suspicious stock-purchase offers, Plessas requested Green Dolphin shareholders to demand physical delivery of their stock certificates from their brokers. The physical withdrawal of the company’s common shares from the electronic trading system was aimed at making it difficult for a potential selling broker to determine whether there was enough stock in the system to cover the short, thereby exposing the extent of the short position and forcing the naked short sellers to buy stock in the open market and cover.

That puts the naked short-seller in a “short squeeze,” which can drive the stock price up as shorts seek shares in the open market, says Hans Stoll, director of the Financial Markets Research Center at Vanderbilt University’s Owen Graduate School of Management.

As for naked shorting, Stoll agrees that short-sellers should be required to borrow shares and make delivery. However, he adds that short-selling unfairly gets a bad reputation because the practice is beneficial as a corrective measure when something is wrong with a company and its stock is overvalued.

Plessas obviously doesn’t think that’s the case with his company. He sees Green Dolphin as a growing small company selling wall cleaners, laundry additions, and non-slip and fire retardant products to clients like Cracker Barrel and Wal-Mart.

That may explain why Plessas is so disenchanted with naked shorting: “It does not reflect the fundamentals,” he says.