From Bob Treitman: “Thanks for your comment on short selling. You answered one question that has always bothered me about shorting, which was who pays the dividend to the stockholder whose shares were borrowed. But there’s at least one other right of ownership: proxy voting. Who gets to vote the shares which two people each think they own? As a buyer, I don’t know whether I’m buying owned or borrowed shares; I expect to be able to vote the shares. As a stockholder, does putting shares in a margin account mean that I am willing to give up my voting rights if my shares are borrowed?”

Yes, that’s exactly what it means. But I didn’t know that until I checked it out — even my own veteran full-service broker didn’t know.

Picture it:

I own 100 Microsoft in my margin account. Meanwhile, someone else — let’s say it’s one of the Spice Girls — decides MSFT is due to fall and shorts 100 shares. That means her broker borrows 100 shares (from my margin account perhaps!) and sells it to yet a third person — we’ll call him Michael Jordan — who’s put in an order to buy MSFT. So Michael buys 100 shares from one of the Spice Girls, who borrowed them from me.

So there am I, who does not even know his shares have been loaned out (as it has no practical effect on my life — I still get any dividends and can sell at any time) and there is Michael Jordan, who also thinks he owns these shares. Which of us gets to vote at the annual meeting? Or by proxy, if we don’t attend? Michael? Me? (And if Michael did attend the annual meeting, who would draw the bigger crowds, Michael or Bill?)

Or do we both get to vote, in which case, though it is only 100 shares, there are 200 votes recorded?

If the question is confusing, the answer, as I say, turns out to be simple: Only Michael, in this example, gets to vote. Swish!

When you buy shares in your margin account, you agree that they may be loaned out for short sales. If they happen to be loaned out on the “record date,” then Michael Jordan is the owner of record, not you, for voting purposes.

If this bothers you, you are free to buy the shares in your “cash account,” which means you will not be able to borrow money against them.

But as a practical matter, the chances of this happening are slim. If a company has 100 million shares outstanding and people have sold 3 million shares short, then only 3% of the outstanding shares have been borrowed for short sales. Maybe yours were among them, but probably not. And as I say, except as regards voting, it makes no practical difference whether they were or not.



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