Short selling is the practice of borrowing stock, then selling it in hopes that the price will go down and it can be bought back at a lower price, generating profit and allowing one to return like shares for the borrowed ones.
"Naked shorting" refers to "shorting" a stock for sale without first borrowing it. When one sells short a non-borrowed stock, one is selling something that they do not possess. The risk, that one may not be able to then acquire the shares needed to deliver on the sale, is a contributing factor to the controversy surrounding this practice.
Securities Exchange Commission, Division of Market Regulation: Key Points About Regulation SHO
Naked short selling is not necessarily a violation of the federal securities laws or the Commission's rules. Indeed, in certain circumstances, naked short selling contributes to market liquidity. For example, broker-dealers that make a market in a security generally stand ready to buy and sell the security on a regular and continuous basis at a publicly quoted price, even when there are no other buyers or sellers.
... Naked short selling, however, can have negative effects on the market. Fraudsters may use naked short selling as a tool to manipulate the market. Market manipulation is illegal. The SEC has toughened its rules and is vigilant about taking actions against wrongdoers. Fails to deliver that persist for an extended period of time may result in a significantly large unfulfilled delivery obligation at the clearing agency where trades are settled. Regulation SHO is intended to address these effects by reducing the number of potential failures to deliver, and by limiting the time in which a broker can permit a fail to deliver to persist. For instance, as explained above, Regulation SHO requires brokers and dealers to close-out the open fail-to-deliver positions in "threshold securities" (i.e., securities that have experienced a substantial number of extended delivery failures) that have persisted for 13 consecutive settlement days.
Eric Weiner, Huffington Post
In case you didn't see the story in Saturday's Times, the Securities and Exchange Commission issued a subpoena to Carol and another respected financial journalist, Herb Greenberg, seeking their notes on stories that were critical of certain companies, particularly those involving a sketchy outfit called Overstock.com.
Unless you follow the stock market fairly closely you probably don't know much about Overstock. But if you do, you've got to be wondering how the SEC ever allowed itself to get involved with these guys.
So what happened, Overstock.com got some negative press and went crying to the SEC? And instead of laughing of laughing them out of the building, the SEC subpoenas the reporters in question?
Society needs an independent press to keep us honest. Great journalists make PR possible. A positive case history or feature story has no credibility unless it is placed in a publication capable of writing negative stories where negative stories are appropriate.
Let us hope the SEC comes to its senses.