Selling Shares He Didn't Own

In the summer of 1969, the president of a broker-dealer firm ran a short-selling scheme. He placed sell orders with several brokers, falsely telling them he owned the shares they were to sell. He expected the stock prices to fall before he had to deliver, so he could buy cheaper shares to cover the sales and pocket the difference. Instead prices rose, and he could not cover the sales or deliver the securities. The brokers, having completed the sales to investors, had to borrow stock and then buy replacement shares at higher prices, suffering large losses, while the investors who bought were not harmed. The prosecution charged fraud in the offer or sale of securities. The defence argued the securities fraud law protects only investors, not brokers.