Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

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Monday, April 16, 2012

SEC Charges optionsXpress with Abusive Naked Short Selling Scheme

The SEC charged optionsXpress, an online brokerage and clearing agency specializing in options and futures, as well as four officers and a customer, with an abusive naked short selling scheme.  According to the SEC, optionsXpress failed to satisfy its close-out obligations under Regulation SHO by repeatedly engaging in a series of sham “reset” transactions designed to give the illusion that the firm had purchased securities of like kind and quantity. The firm and customer Jonathan I. Feldman engaged in these sham reset transactions in a number of securities, resulting in continuous failures to deliver.

Regulation SHO requires the delivery of equity securities to a registered clearing agency when delivery is due, generally three days after the trade date (T+3). If no delivery is made by that time, the firm must purchase or borrow the securities to close out the failure-to-deliver position by no later than the beginning of regular trading hours on the next day (T+4).

The former chief financial officer at optionsXpress – Thomas E. Stern – was also named in the SEC’s administrative proceeding against the firm and Feldman, while three other optionsXpress officials – head of trading and customer service Peter J. Bottini and compliance officers Phillip J. Hoeh and Kevin E. Strine – were named in a separate administrative proceeding and settled the charges against them for their roles in the scheme.

According to the SEC’s order, the misconduct occurred from at least October 2008 to March 2010. In September 2011, optionsXpress became a wholly-owned subsidiary of The Charles Schwab Corporation.

http://lawprofessors.typepad.com/securities/2012/04/sec-charges-optionsxpress-with-abusive-naked-short-selling-scheme.html

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