Belligerati

You mighty be inclined to say Charles does, because Abigale lent out her stock. There are a couple of problems with that. First, it isn't treated as a sale by the tax code. No capital gains is triggered by this event, and, as we stipulated in the beginning, she didn't intend to sell the shares, she just wanted to lend them. Second, market convention is that she is stil collecting dividends, although not from the company, she collects them from Betty. So maybe Charles does not own them. But how could Charles know he was buying shorted shares and not real ones? All he did was buy ordinary shares though his broker from the NYSE. He certainly gets dividends, and has every reason to believe he is the true owner. For that matter, Abigale may have purchased her shares from someone else (say Zoe)!

You can't fix this by saying that you can't borrow the voting rights on the stock. If you want a functioning market for shorting shares (which is essential to the accurate pricing of other things, like stock options), they need to be totally fungible with other shares (including voting) that are obviously owned outright. But is it both? At first that seems attractive, but what about the matter of voting? What happens when both Abigale and Charles each try to vote their 100 shares? How could Abigale, Betty, and Charles together create additional shares without the permission of the other owners of the firm? We have a real problem here...

One of the major benefits of owning stock is participating in the oversight of the company by voting your shares.There are annual votes on major issues, like who should be on the board of directors, if you should buy another company, or accept an offer to be bought by another. Sometimes,these votes are close, often when they matter most, like when a great deal of money or numerous jobs are on the line. If you could alter the outcome by voting more shares than you have, then you might stand to make a great deal of money, prevent a takeover by another firm so your firm can sweep in and buy it on the cheap, or just keep your factory form closing. Enough power to alter the vote ensures you control the company.

This more than a theortical problem. The Securities Transfer Association

(a trade group for stock transfer agents) examined 341 shareholder votes in 2005 corporate matters. They found evidence of the submission of too many ballots every single one. Worse, some people are lending out shares without their knowledge. The documents used in opening accounts to allow buying on margin typically permit brokers to loan out their stocks for this purpose without informing the investors. Who is actually doing the double voting can be difficult to catch (although it must be taking place whenever votes exceed the number of shares), because not everyone vote their shares. Regulators can put a damper on this activity by counting the number of shares a broker has on record and making sure they don't submit more than that many votes. Deutsche Bank got in trouble for that a couple of weeks ago.

No obvious solution presents itself to me, but a very interesting problem. Check out a whole paper on the subject by Apfel et al.