Been doing some reading on the effect of phantom shares, theoretically and real life examples, and found many opinions that while naked shorts may give the appearance of a larger float (dilution), what is actually going on is that there a multiple owners of existing shares (fails to deliver). In practice, there is probably little difference between the two as far a how it affects the share price (artificially depressed).
According to the article below, naked shorts can actually cause a larger squeeze than what would happen if all the shorts were legal ones (assuming we get approved, of course):
The economics of naked short selling: naked shorting is little different from permissible shorting
by Christopher L. Culp, J.B. Heaton
When there is only permissible short selling, short sellers can cover their shorts when demanded by security lenders by buying back from the new owners who bought the expanded supply ([Q.sup.o s]-[Q.sup.o]). The demand curve, after all, is defined as the demand for the stock at those particular prices. A short seller that must cover thus need only buy back stock up the demand curve until the price returns from [p.sup.o s] back to [p.sup.o] (where we are assuming that demand never shifted down). At this point, the new buyers are returned to their original positions and the short seller has lost transaction costs but nothing else. The price has "bounced" from [p.sup.o] to [p.sup.o s] and then back to [p.sup.o].
Now consider Figure 3, which depicts what happens when only naked short selling occurs and the buyers with failures to receive initiate buy-ins. Initially, the naked short selling creates a price [p.sup.o s] from the "as-if" increase in supply from [Q.sup.o] to [Q.sup.o s]. But none of the new buyers hold the stock because of failures to deliver caused by naked short selling.
If the new buyers demand delivery, the short seller has no choice but to buy from existing owners. In order to deliver, the short seller must buy quantity ([Q.sup.o s]-[Q.sup.o]) in the market to obtain stock to deliver. Because the shares can only come from current owners that value the stock at price [p.sup.o] and above, acquiring ([Q.sup.o s]-[Q.sup.o]) will drive the price up to P*. This is not in equilibrium, however, because the new owners value the stock less than the market price and thus will sell the stock back to the old owners who sold to the short seller. This, in turn, drives the price back to [p.sup.o], leaving the stock in the same hands as before but precipitating a wealth transfer from the short seller to the new buyers. Price volatility is higher here because price bounces up to P* from [p.sup.o s] before bouncing back to [p.sup.o]. Under permissible short selling, the price only bounced from [p.sup.o s] to [p.sup.o] when the short seller was forced to cover.