If you want to get a controversy going on Web business sites, bring up naked shorting. So what will happen when a mainstream business outlet like Bloomberg News says naked shorts brought down Lehman Brothers, the failure of which, recall, turned a disaster into a catastrophe last September?

If it’s right it’s a blockbuster—and a devastating blow for a financial press that has pooh-poohed the naked-shorting issue. But this story is problematic and its case seems very thin.

First a brief explainer from me on naked shorting:

Short-selling is when investors bet that a company’s stock will go down. They do this by borrowing the company’s shares from someone, selling them and promising to replace those shares at a future date. If the stock price goes down, they replace them with cheaper shares and pocket the difference. Investors often hate shorts because they don’t play the “game”—the one where everybody wins if stocks go up, up, up. But shorting is a legitimate activity that helps bring efficiency to stock markets. They counteract the bubblicious pressures of “longs” and, since they have an incentive to, often spot problems at a company before others.

Naked short-selling is when someone shorts without actually borrowing the stock. That’s not illegal—the rules say you have to reasonably expect you’ll be able to borrow the stock within a brief period after your trade. It is illegal to do this if you don’t expect to actually borrow the shares.

Got it?

Bloomberg has some interesting stuff in its piece today, but it’s ultimately unconvincing. And it certainly doesn’t justify dropping the word “fraud” in a news-story headline (“Naked Short Sales Hint Fraud in Bringing Down Lehman”) or using this lede:

The biggest bankruptcy in history might have been avoided if Wall Street had been prevented from practicing one of its darkest arts.

The piece’s peg is a report issued yesterday by the SEC Inspector General that criticized how the agency has handled the naked-shorting issue. Here’s the nut of Bloomberg’s evidence:

As Lehman Brothers Holdings Inc. struggled to survive last year, as many as 32.8 million shares in the company were sold and not delivered to buyers on time as of Sept. 11, according to data compiled by the Securities and Exchange Commission and Bloomberg. That was a more than 57-fold increase over the prior year’s peak of 567,518 failed trades on July 30.

Now, I don’t have a dog in the naked-shorts fight. I can’t tell you if this is being done illegally on a large-scale and having a real impact on companies. I just don’t know.

But one of the first things that comes to mind here is—wouldn’t you expect fails-to-deliver to soar for a company teetering on the brink of bankruptcy under an avalanche of bad news? I’d expect there would be a rush to short a stock like Lehman, which was about to collapse anyway. So, people who usually could expect to borrow shares to short might have found that they couldn’t because everybody else was doing the same thing.

Now, Bloomberg does quote a hedge-fund industry representative saying such a thing happening in a liquid stock like Lehman is a “red flag”:

Failed trades in stocks that were easy to borrow, such as Lehman Brothers, constitute a “red flag,” said Richard H. Baker, the president and CEO of the Washington-based Managed Funds Association, the hedge fund industry’s biggest lobbying group.

“Suffice it to say that in a readily available stock that is traded frequently, there has to be an explanation to the appropriate regulator as to the circumstances surrounding the fail-to-deliver,” said Baker, who served in the U.S. House of Representatives as a Republican from Louisiana from 1986 to February 2008.

The graph preceding those is the only one where reporter Gary Matsumoto concedes there might be legitimate explanations for fails-to-deliver:

On its Web site, the Federal Reserve Bank of New York lists several reasons for fails-to-deliver in securities trading besides naked shorting. They include misunderstandings between traders over details of transactions; computer glitches; and chain reactions, in which one failure to settle prevents delivery in a second trade.

Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at rc2538@columbia.edu.