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madamswer,
This scenario still bothers me greatly, and in the context (your context) that shorting is good for the market...you know, stabilizes everything, achieves pricing accuracy.

So I thought I would throw the ball back to you; please do me a favour and fill in the gaps here.

(1) A few million shares were recalled. A holder who would need to be a large holder "decided" quite suddenly to recall a block of shares from a "loan pool". The loan pool shares were there for the express purpose of enabling shorting of MSB stock.
(2) The recall one assumes came like a bolt from hell for someone. It precipitated a wave of short covering on market. I assume the large lender (above) was not totally ignorant of what might be the effect of the withdrawal - after all I think we can assume he is a professional player...you know, ear to the ground, all that sort of thing.
(3) The short covering (buying) drove the share price up toward $5.88 in only a few days - thereby putting the original holder in lets say a a 30%+ better position on paper.
HOW VERY CONVENIENT FOR HIM!!!!!!
(4) Then on your theory, those same shares started hitting the ASX as sell orders. I didn't bother checking the trade volume yet - but I will. How very wonderful for the original holder who: got his 1% Judas margin you told us about by lending out shares in our company, then managed to accidentally precipitate a short covering bonanza - which he SOLD INTO!!!
I don't suppose you could give us a clue to the seller identity.

Anyway maybe you were wrong.

Maybe the whole festering rotten thing is the best interests of the market.