Below is a definition and explanation of naked short selling from Investopdia:
Definition of 'Naked Shorting'You can find the definition here
The illegal practice of short selling shares that have not been affirmatively determined to exist. Ordinarily, traders must borrow a stock, or determine that it can be borrowed, before they sell it short. But due to various loopholes in the rules and discrepancies between paper and electronic trading systems, naked shorting continues to happen.
While no exact system of measurement exists, most point to the level of trades that fail to deliver from the seller to the buyer within the mandatory three-day stock settlement period as evidence of naked shorting. Naked shorts may represent a major potion of these failed trades.
Investopedia explains 'Naked Shorting'
Naked shorting is illegal because it allows manipulators a chance to force stock prices down without regard for normal stock supply/demand patterns.
In 2007, the Securities and Exchange Commission (SEC) amended Regulation SHO to further limit possibilities for naked shorting by removing loopholes that existed for some broker/dealers. Regulation SHO requires lists to be published that track stocks with unusually high trends in "fail to deliver" shares. Some analysts point to the fact that naked shorting, albeit inadvertently, may help markets stay in balance by allowing the negative sentiment to be reflected in certain stocks' prices.
WaMu Trustees Seek Goldman Probe
By Peg Brickley, Dow Jones Newswires - Fox Business
. . . .
Creditor attorneys say there's "unmistakable" evidence Washington Mutual was victimized by naked short sales in the months leading up to its September 2008 bankruptcy filing. They want to know if long-time investment banker Goldman Sachs was involved in "abnormally high levels' of short selling of Washington Mutual's stock.
Washington Mutual was the holding company that owned Washington Mutual Bank, or WaMu, a thrift swept under in 2008 after indulging in the subprime lending boom. Its final affairs are in the hands of a bankruptcy trust.
Goldman Sachs was called on by Washington Mutual, charged with shoring up market confidence and locating a buyer, court papers say.
"Instead of providing this promised support to [Washington Mutual], it appears that Goldman Sachs may have decided it could make more money by betraying its client," court papers allege.