I don't think naked shorting of penny stocks is illegal, but it is near impossible and extremely rare. Check w/ your or any broker and find out the requirements. I guarantee you won't short any pennies.

As far as the "short report" that is often refered to on boards, it is extremely misleading. I don't remember the exact details, but the shares are only being shorted in a technical sense, and are almost always covered immediately. As I recall, when you buy a stock, brokers will often credit you w/ the shares (in essence shorting them) and then buy them for you. (I may have misremembered the details, but something like that...) So technically there has been a short, but only in the sense that the sell occured before the buy. That site nevertheless reports the sale as shorts. Check it out, and you will see huge quantities of shorts reported every day for months or years on end for pretty much every stock. If the shorts that site reported were really "shorts", every stock would be worthless.