Fake ‘Reset’ Transactions Busted

April 18, 2012 /

A federal lawsuit became the price of their attempt to avoid compliance with the delivery requirements of equity securities to a registered clearing agency in due time.

The US Securities and Exchange Commission charged Chicago-based optionsXpress, an online brokerage and clearing agency specializing in options and futures as well as four officials at the firm namely, Thomas E. Stern (former chief financial officer), Peter J. Bottini (head of trading and customer service), Phillip J. Hoeh and Kevin E. Strine (compliance officers) and customer Jonathan I. Feldman for their involvement in an abusive naked short selling scheme.

The SEC’s Division of Enforcement alleges that optionsXpress failed to satisfy its close-out obligations under Regulation SHO by engaging in a series of sham “reset” transactions from at least October 2008 to March 2010, which was designed to make the firm out to have purchased securities of like kind and quantity.

The firm and Feldman engaged in these sham reset transactions in a number of securities, resulting in continuous failures to deliver, the SEC said.

Regulation SHO requires the delivery of equity securities to a registered clearing agency when delivery is due, generally three days after the trade date. 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.

The four officials are facing administrative proceedings.

“Feldman and optionsXpress used sham reset transactions to avoid, sometimes for months, compliance with Reg. SHO’s stock delivery requirements,” said Robert Khuzami, Director of the SEC’s Division of Enforcement.

“In effect, they ‘kited’ shares of stock, thus depriving buyers of the benefit of their bargain – prompt delivery of their shares.”

Daniel M. Hawke, Chief of the Division of Enforcement’s Market Abuse Unit, added, “Reg. SHO compliance continues to be a high enforcement priority. Broker-dealers, their employees, and their customers must ensure that they comply with the close-out requirements of the short sale rules and regulations.”

The SEC’s Enforcement Division alleges that the sham reset transactions impacted the market for the issuers. For example, from Jan. 1, 2010 to Jan. 31, 2010, optionsXpress customers including Feldman accounted for an average of 47.9 percent of the daily trading volume in one of the securities. In 2009 alone, the optionsXpress customer accounts engaging in the activity purchased approximately $5.7 billion worth of securities and sold short approximately $4 billion of options. In 2009, Feldman himself purchased at least $2.9 billion of securities and sold short at least $1.7 billion of options through his account at optionsXpress.

In the separate settled administrative proceeding, Bottini, Hoeh, and Strine consented to a cease-and-desist order finding that they caused optionsXpress’s violations of Rules 204 and 204T of Regulation SHO and ordering them to cease-and-desist from committing or causing violations of Rule 204. They neither admitted nor denied the SEC’s findings.

The SEC’s investigation was conducted by Deborah Tarasevich, Jill Henderson, and Paul Kim. Market Surveillance Specialist Brian Shute, Market Abuse Unit Trading Specialist Ainsley Fuhr, and Financial Economist Michael P. Barnes provided assistance with the investigation. The litigation will be led by Frederick Block.


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