Naked shorts are still legal if you're a market maker, for example. They're not entirely bad, it's sort of like credit - it's only bad when you fail to deliver. If you do deliver then it's great as it lubricates the system. See "Regulation SHO":

https://www.sec.gov/investor/pubs/regsho.htm

Not sure if this was the case at your company, i.e. if they had the permission to do so. If not then I don't know why they didn't prosecute that trader. Most organizations cannot do naked shorts and have to pre-borrow securities.