GolfYeti...this is my understanding so take it with a grain (or a box full) of salt.

Its my understanding that penny stocks (under $5) have a margin requirement of 250%.  So someone shorting a 10,000 shares of a $2 stock nets $20,000 from the sale, but is required to have $50,000 in his margin account.  

Now that $2 stock goes to $2.50....so the broker calls Mr Short Player and tells him he needs to ante up another $12,500.  And so it goes...the stock goes to $3 and Mr Short has to ante up another $12,500....$75,000 now in other words.  

The reason for 250% excess is because penny stocks can jump big.  Anyway let's say the stock gets to $4 and Mr Short only has $75,000 in his margin account when he's required to have $100,000

So his broker then takes $40,000 (or more if the PPS keeps going up) and covers the short position.

That's my understanding, please verify.