Actually, Mr. B borrows from a broker. If they are shares held by the broker in inventory, then the broker is Mr. A and obviously your description is wrong.
But even in other cases it's wrong: the shares may be from Mr. A's margin account with the same broker, in which case the margin account contract included the right for the broker to lend the shares; so Mr. A has already been asked about loaning shares and accepted.
Similar analysis can be extended to the case where Mr. A is either another broker lending inventory shares to the broker lending to Mr. B or where Mr. A has a margin account with such a broker.
No one is lending shares unless they own them or have a contract with the owner where the owner has agreed to allow such lending.
Securities in a cash account can't be lent out by the broker without the written agreement of the customer. The necessary language could theoretically be put into the standard account agreement, so if you care you should read it. However, it is not common business practice to include that in retail customer account agreements. Also, the broker is required to notify you whenever your shares are borrowed, and this requirement cannot be waived by the agreement. So if you haven't been notified about lending activity, your broker is not lending your shares. The same requirements hold for fully paid securities held in a margin account, so even if you have a margin account, if you're not actually borrowing money from them, they're not lending your shares without your knowledge.
> If they are shares held by the broker in inventory, then the broker is Mr. A
except then Mr A does not own the shares, there is in fact a Mr Ax who lent Mr A's shares to Mr B.
> No one is lending shares unless they own them or have a contract with the owner where the owner has agreed to allow such lending.
as others point out, this is going to be in the small print of the brokers account
However, I think Mr B is still fraudulent as Mr C bought some shares that were not for sale. I guess shares are supposed to be fungible but in some way they are not exactly - if the company has a share register, and shares are numbered then what number does Mr C get? If Mr C is offering to buy future-shares then he knows that he doesn't have a share today but that isn't what happened, he understood that he has bought something not an option to buy.
> I guess shares are supposed to be fungible but in some way they are not exactly - if the company has a share register, and shares are numbered then what number does Mr C get?
Currency is also numbered. If I lend you $20, it's not fraud to give me a $20 back with a different serial number on it. It's not even fraud to give me back two $10s. Adding those kinds of restrictions would defeat much of the point of lending you $20 in the first place. It's also not fraud to spend it at Mr C's eatery for lunch, and hope you can replace it later - in fact, that's the whole point of borrowing money.
> However, I think Mr B is still fraudulent as Mr C bought some shares that were not for sale. I guess shares are supposed to be fungible
The entire idea of margin accounts, stock exchanges, etc., is that shares of the same class in the same firm are, in fact, absolutely and perfectly fungible; thats the agreement you make when you participate in those systems. If that wasn't the case, you'd have specific bid/ask prices for individual shares.
> if the company has a share register, and shares are numbered then what number does Mr C get?
The one that was borrowed, which must be replaced by the borrower with an equivalent one at the end of the specified term, per the terms of the contract under which it was borrowed (this is true for all the borrowers in the chain, however deep it may be.)
But even in other cases it's wrong: the shares may be from Mr. A's margin account with the same broker, in which case the margin account contract included the right for the broker to lend the shares; so Mr. A has already been asked about loaning shares and accepted.
Similar analysis can be extended to the case where Mr. A is either another broker lending inventory shares to the broker lending to Mr. B or where Mr. A has a margin account with such a broker.
No one is lending shares unless they own them or have a contract with the owner where the owner has agreed to allow such lending.