Actually that is very "easy" to do, first you short sell some stock (naked short) for $1M, then the stocks value goes up by $8M. You are asked to cover your short and even after your $1M you are still left holding $7M in liabilities.
This is incorrect. You can’t talk about absolute $8mill gain without talking about the total market cap (total value) of the stock.
What would have happened that the company its not increase by $8mill but increase by 8 times the current value which is more possible to happen for small cap stocks.
Yes agreed with your example. The total loss in your example is only 16%. In the example provided above he starts with $1mill and has a loss of $7 mill. Thats a 700% loss.
Umm, you know how short sales work right? You're borrowing shares to sell them at current prices and then have to return the shares later. If the price rises, you are out the difference between what you sold at and what you repurchase at for when the call to cover comes in.
From Wikipedia: "Naked short selling, or naked shorting, is the practice of short-selling a tradable asset of any kind without first borrowing the security or ensuring that the security can be borrowed, as is conventionally done in a short sale." It is really easy to lose your shirt with a naked short.
Naked shorting doesn't do much to exacerbate the downside of shorting a security. Even if you have borrowed the security, you still have an unlimited downside (i.e. the stock price _can_ go to infinity).
Naked shorting is more of a systemic problem because you can put downward pressure on a stock even when the market is not willing to sell at the price you are pretending to sell at. It also makes it hard to keep track of voting shares and you can see many more votes than actual shares.
Look at the agreement you sign when opening a brokerage account. You give the brokerage firm the right to loan out any shares of stock you own. I believe this only happens in accounts that have margin (you do have to have a margin account to short), but I am not entirely certain.
This scenario might be called a "short squeeze". If you can't actually borrow the stock which you've located before shorting - then you get "bought in" - and your broker will just buy shares at whatever price is necessary to cover.
Maybe he could launch a GoFundMe like that guy that lost $100K on E*trade shorting stocks. Although either he or GoFundMe at least had the good conscience to delete that campaign...