The SEC on Monday charged an online brokerage and clearing agency specializing in options and futures, along with 4 firm officials and a customer, with engaging in an abusive naked short selling scheme. Respondents in the Scheme. optionsXpress a self-clearing, retail, on-line broker specializing in options and futures, with a principal place of business in Chicago, IL.  The firm is a FINRA member, the CBOE, various stock exchanges, and is registered with 53 states and territories.  optionsXpress was a wholly-owned subsidiary of optionsXpress Holdings, Inc. until 9/1/11. when it became a wholly-owned subsidiary of Schwab. Thomas Stern, 66, of Chicago, IL, was a who's who at optionsXpress.  He was: (i) CFO of optionsXpress; (ii) CAO of Holdings; (iii) Pres., CEO, CCO and Director of optionsXpress Int'l;  (iv) CFO and Director of brokersXpress, LLC; (v) CFO, Secretary, Director, and CCO of OX Trading, LLC.  He is a board member of the OCC, who holds himself out as an options industry expert.  He holds Series 3, 4, 7, 24, 27, and 63 licenses. Jonathan Feldman, 55, of Baltimore, MD, was a retail customer of optionsXpress.  He is an SVP at a regional savings bank, and, in June 2010, he was fined by the Office of Thrift Supervision for making material misrepresentations and/or concealing material facts as part of a scheme to defraud a federally insured financial institution. SEC Findings and Allegations. The SEC’s Division of Enforcement alleges that Chicago-based 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 Feldman engaged in these sham reset transactions in a number of securities, resulting in continuous failures to deliver.  Former CFO Tom Stern also was named in the SEC’s administrative proceeding.

Reg SHO requires the delivery of equity securities to a registered clearing agency when delivery is due, generally 3 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).

According to Enforcement Director Robert Khuzami: "Feldman and optionsXpress used sham reset transactions to avoid, sometimes for months, compliance with Reg. SHO's stock delivery requirements. In effect, they 'kited' shares of stock, thus depriving buyers of the benefit of their bargain - prompt delivery of their shares." The alleged misconduct occurred from at least October 2008 to March 2010.  In September 2011, optionsXpress became a wholly-owned subsidiary of The Charles Schwab Corporation. It's charged that the sham reset transactions impacted the market for the issuers, as evidenced in the following examples:

• From 1/1/10 to 1/31/10, optionsXpress customers including Feldman accounted for an average of 48% 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.

• Note:  For a more detailed discussion of the transactions conducted by Customers, and allegedly abetted by optionsXpress, go to Tuesday's posting in BTN, "Abusive Naked Short Selling Scheme – A Road Map"]

Violations. By engaging in the alleged misconduct, optionsXpress violated Rules 204 and 204T of Regulation SHO; Feldman willfully violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Rules 10b-5 and 10b-21 thereunder; optionsXpress and Stern caused and willfully aided and abetted Feldman’s violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rules 10b-5 and 10b-21 thereunder; and Stern caused and willfully aided and abetted optionsXpress’s violations of Rules 204 and 204T. 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. SEC Staff Contacts. For more information, contact: Daniel Hawke, Chief, SEC’s Market Abuse Unit and Regional Director, Philadelphia Regional Office (215) 597-3191; and Deborah Tarasevich, Assistant Director, Market Abuse Unit, SEC Division of Enforcement (202) 551-4726. For further details, go to:  [SEC PR 12-66, 4/16/12], [SEC Order vs. optionsXpress, Stern, Feldman], and [SEC Order Against Bottini, Hoeh, and Strine].