Naked Short Selling and Lehman: A Failure-to-Deliver

To put it simply (comments and clarifications welcome):

Short Sale

• Borrowing and selling shares of a particular stock.
• Then locating and delivering those shares at a later date (usually within 3 days). 
• If the price goes down, there is a profit -- price at time borrowed minus price at time delivered. 
  
• Moral: A short sale drives down the share price of the stock because it is a sale. Supply and demand -- a sale increases supply, down goes price.

Naked Short Sale

• A short sale where the shares sold are never located and delivered.
• Equivalent of selling shares that have not been authorized by the issuer.
• Moral: Acts as a dividend, increases supply and further drives down the share price.

The following article is fairly comprehensive, but worthwhile: Naked Short Sales Hint Fraud in Bringing Down Lehman (Bloomberg).