Three days after charging optionsXpress and ex-CFO Thomas Stern with abusive naked short selling, the SEC on Thursday charged both, along with an affiliated broker-dealer, with registration violations.  It's alleged that OX Trading LLC operated as an unregistered dealer from October 2009 to November 2010 and illegally transacted in securities while not a member of a national securities association or national exchange from March 2009 to November 2010. Administrative proceedings were filed against OX Trading LLC, optionsXpress, and Thomas Stern.  OX Trading and optionsXpress became wholly-owned subsidiaries of The Charles Schwab Corporation in September 2011.

[C-I Note: Click to read these WWW stories, posted 4/16: 'Abusive Short Selling';  'Compliance Officers Settle Charges'.]

"OptionsXpress, OX Trading, and Stern have displayed a profound disregard for regulators, compliance obligations, and the regulatory requirements that dealers must satisfy for the privilege of operating in our markets." -- Daniel Hawke, SEC Market Abuse Unit Chief.

SEC Allegations. CFO Stern allegedly terminated OX Trading’s membership with CBOE, and ended that firm’s B/D registration with the SEC.  However, "OX Trading quietly continued to conduct trading through a customer account at optionsXpress." Stern's Response. Stern, who also was OX Trading’s CCO, responded in writing to the SEC by demonstrating that he had properly informed CBOE that OX Trading would deregister and become a customer of optionsXpress. SEC Findings and Allegations. According to SEC records, OX Trading, which first registered with the SEC in 2008, was created to provide price improvement on orders from optionsXpress customers and to profit from those trades.  OX Trading would receive electronic requests for quotes (RFQs) from optionsXpress - enabling OX Trading to determine whether it wanted to be the counterparty to an optionsXpress customer’s order.  OX Trading allegedly made money when it traded as a counterparty to optionsXpress customer orders and hedged the positions created by those trades. A CBOE examiner reportedly conveyed to Stern in early 2009 that OX Trading was required to have an annual audit based on its CBOE membership status.  Stern refused to pay for an audit and subsequently terminated OX Trading’s CBOE membership on 3/2/09.  Nonetheless, OX Trading continued to conduct the same trading through a customer portfolio margin account at optionsXpress. Again, as noted above, the SEC contends Stern did not inform CBOE that OX Trading would continue its operations as a customer of optionsXpress - a charge he refutes and evidences with a copy of his purported letter to CBOE. After Stern was contacted by the SEC’s Division of Trading and Markets, Stern filed a form with the SEC on 8/18/09, deregistering OX Trading as a broker-dealer.  Deregistration became effective 10/17/09.  On or about this time, Stern allegedly issued an internal email stating, to the effect: OX Trading "stalled as long as we could" in deregistering. OX Trading continued to trade through the customer portfolio margin account at optionsXpress. In late 2009, CBOE allegedly conducted an audit of optionsXpress, at which time its examiners identified the OX Trading customer account.  CBOE asked why OX Trading was not registered with the SEC as a broker-dealer.  This reportedly prompted an internal email from Stern, who stated: "I am happy to spin this however it needs to be." Thereafter, Stern sent CBOE a letter containing numerous factual inaccuracies and no legal opinion or analysis about OX Trading’s registration status.  CBOE responded with a letter in June 2010 informing Stern that it believed OX Trading was functioning as a dealer and needed to either cease operations or obtain a written opinion from the SEC confirming that OX Trading was not required to register.  OX Trading did neither.  OX Trading eventually acquired a CBOE trading permit and registered again with the SEC, effective 11/16/10. Violations, Based on SEC Findings. In its order (see link below) the SEC charges OX Trading with having violated Sections 15(a) and 15(b)(8) of the Exchange Act;  Stern and optionsXpress allegedly caused and willfully aided and abetted those violations. SEC Staff Credits. Investigation by:  Deborah Tarasevich, Jill Henderson, Paul Kim, assisted by Market Surveillance Specialist Brian Shute, Market Abuse Trading Specialist Ainsley Fuh.  Litigation will be led by Frederick Block. For further details, go to:  [SEC PR 12-68, 4/19/12] and [SEC Order, '34Act Release 66831, 4/19/12].