Naked-shorting datapoint of the day, Carl Icahn edition

By Felix Salmon
October 14, 2009
Nathan Vardi, to his credit, doesn't use the term "naked shorting" in his story today about a dispute between Carl Icahn's High River Limited Partnership and Goldman Sachs. But that's what he's talking about -- and, interestingly, the securities in question aren't stocks. They're bank loans:

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Nathan Vardi, to his credit, doesn’t use the term “naked shorting” in his story today about a dispute between Carl Icahn’s High River Limited Partnership and Goldman Sachs. But that’s what he’s talking about — and, interestingly, the securities in question aren’t stocks. They’re bank loans:

“High River apparently ‘sold short’ the bank debt, anticipating that the market price of the bank debt would decrease,” Goldman says in its lawsuit…

“Neither the fact that High River did not own the bank debt at the time it entered into the contracts, nor the fact that the market has moved against High River, nor any other reason, excuses High River from meeting its contractual obligations,” Goldman says.

High River of course says it will contest the lawsuit. But would naked-shorting Delphi loans even be illegal? They’re not exchange-traded securities, after all, and all we’re really talking about here is a bilateral contract between High River and Goldman under which High River agrees to sell certain loans at a certain price. It’s foolhardy to enter into such a contract if you don’t actually own the loans in question. But is it illegal? That’s less obvious.

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3 comments so far

Isn’t it fraud to enter into a legal agreement to sell something you don’t own? You know, like selling someone the Brooklyn Bridge?

In any case, since they can’t deliver, they are in breach of the contract, so what is their case?

Posted by KenG | Report as abusive

It would seem to turn on what representations High River made to Goldman in those 9 contracts.

Posted by peatey | Report as abusive

I don’t read anything in the linked article suggesting that what High River did was illegal; it is a civil suit to force High River to actually meet the terms of the contract. I’m probably just missing Felix’s point.

Posted by MattJ | Report as abusive
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