SEC Charges OptionsXpress Over Naked Short Selling


Online brokerage optionsXpress and five individuals were charged by the U.S. Securities and Exchange Commission on Monday with involvement in a so-called naked short-selling scheme.

Short sellers sell borrowed shares in the hope they can be bought back at a lower price. Naked short-selling involves selling shares without first borrowing them.

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The SEC said optionsXpress engaged in a series of sham transactions that violated "Regulation SHO" a rule that requires equity securities to be delivered generally three days after the date of a trade.

OptionsXpress, former Chief Financial Officer Thomas Stern and Jonathan Feldman, a customer, were charged in the SEC's proceeding, which will be heard by an administrative law judge.

Three other company officials, head of trading Peter Bottini and compliance officers Phillip Hoeh and Kevin Strine, settled related charges in separate administrative proceedings without admitting or denying the regulator's findings.

Feldman "engaged in legitimate trading through a reputable brokerage firm," and "believed, and still believes, that his brokers complied with all rules," said his lawyer, Gregory Lawrence.

Attorneys for the company and the other defendants had no immediate comment.

The SEC said the misconduct lasted from at least October 2008 to March 2010. Charles Schwab Corp bought optionsXpress last year.

"Feldman and optionsXpress used sham reset transactions to avoid, sometimes for months, compliance with Reg. SHO's stock delivery requirements," said Robert Khuzami, the director of the SEC's enforcement division. "In effect, they 'kited' shares of stock, thus depriving buyers of the benefit of their bargain -- prompt delivery of their shares."

Short-selling came under attack during the financial crisis from critics who said it helped drive down the price of financial stocks.

Some lawmakers in 2009 urged the SEC to crack down on naked short-selling after the agency's internal watchdog issued a report criticizing the agency for not pursuing more short-selling complaints.

Since 2007, the SEC has filed at least eight cases involving violations of Reg SHO and at least three others involving naked short-selling, according to an SEC spokesman.