The SEC charged 2 brothers - one in Chicago, the other in New York - with naked short sales to broker-dealers and, not locating and delivering those shares.  Naked short selling occurs without having borrowed the securities to make delivery. In its instituted administrative proceedings, the SEC state that Jeffrey and Robert Wolfson generated over $17 million in illicit from the naked short sale transactions, that involved some big-name stocks - including Chipotle Mexican Grill, Fairfax Financial Holdings,  Novastar Financial, and NYSE Group.  As Jeffrey Wolfson stated in a recorded telephone conversation, “What I sell them is not guaranteed, it never gets delivered, it’s funny paper.” SEC Findings and Allegations. SEC Enforcement alleges that Jeffrey Wolfson engaged in illegal naked short sales while working as a broker-dealer himself and later as the principal trader at a Chicago-based broker-dealer that's no longer in business.  He also taught his brother and others how to do it. Robert Wolfson conducted illegal naked short sales while trading through an account at New York-based Golden Anchor Trading II LLC (now Barabino Trading LLC) - which also was named in the SEC enforcement action. The Wolfsons engaged in 2 types of transactions from July 2006 to July 2007, both in violation of Reg. SHO.

1.  A “reverse conversion” or “reversal” - selling stock short and simultaneously selling a put option and buying a call option on the stock.  The Wolfsons did not locate the stock before the sale, nor did they deliver the shares when sold or make a bona fide purchase of the stock when required to close out their resulting fail-to-deliver position. They were not entitled to the market maker exception to Regulation SHO because the short sales were not made in connection with bona-fide market making activities.

2.  A stock and option combination - to create the illusion that the party subject to a close-out obligation had satisfied that obligation by buying the same kind and quantity of securities it had sold short.  However, the stock was always sold back either the next day or within several days, and the Wolfsons knew or had reason to know that the shares ostensibly purchased in these sham transactions would never be delivered because they were purchased from another naked short seller who did not have the stock either.  The Wolfsons entered into a significant number of these sham "reset" transactions with each other and also took the other side of the "reset" trades done by each other as well those done by other market participants.

SEC's Determinations. Jeffrey Wolfson's actions willfully violated and willfully aided and abetted and caused the broker-dealer to violate Rule 203(b)(1) of Regulation SHO, and willfully violated and willfully aided and abetted and caused others to violate Rule 203(b)(3) of Regulation SHO. It further alleges that Golden Anchor willfully violated, and Robert Wolfson willfully aided and abetted and caused Golden Anchor's violations of Rules 203(b)(1) and 203(b)(3) of Regulation SHO. The administrative proceedings will determine what relief, if any, is in the public interest against Jeffrey Wolfson, Robert Wolfson and Golden Anchor, including disgorgement of ill-gotten gains, prejudgment interest, financial penalties, a censure or a suspension or bar from association with any broker-dealer. SEC NYRO Staff Credits. Investigation by: Steven Rawlings, Peter Altenbach, Daniel Marcus, Layla Mayer;  litigation will be led by Kevin McGrath. The SEC’s investigation into violations of Regulation SHO is continuing. For further details:  [SEC PR 12-22, 1/31/12] and  [SEC Order Against the Wolfsons].