Federal securities regulators allege an executive at Eastern Savings Bank in
In an administrative case, the U.S. Securities and Exchange Commission said that Chicago-based optionsXpress, four of the firm's officials and Jonathan I. Feldman, a senior vice president at Eastern Savings, violated SEC rules by engaging in a plan to profit off a series of "sham" transactions designed to give the impression that the firm had bought certain securities.
Short-selling is a legal trading practice, in which investors make money by betting that the price of a stock will fall. The seller borrows shares in a stock and sells them, and later must repurchase them in the market — hopefully at a lower price — to return them to the original owner.
In this case, the SEC is alleging what is called "abusive naked" short-selling, which involves selling shares in a stock without borrowing them. Critics say the practice could allow price manipulation and the SEC has cracked down, enacting rules in 2008 to close loopholes and requiring short sellers and their brokers to close out short sales within certain periods of time.
The brokerage firm helped Feldman in this fraud, the SEC said in the complaint. In 2009, the SEC said, Feldman purchased at least $2.9 billion of securities and sold short at least $1.7 billion of options through his account at optionsXpress, an online futures and options brokerage owned by the
Feldman was the sole retail customer named in the complaint. He referred questions to his attorney, who denied the charges.
"Mr. Feldman is a hard-working, decent family man and professional," attorney Gregory T. Lawrence said. "Mr. Feldman entered legitimate open-market trades, and he believed, and still believes, that his brokers complied with all rules. The SEC is unfairly trying to change the rules through litigation."
Feldman and the others have 20 days to formally respond. An adminstrative law judge will conduct a hearing within 30 to 60 days. The judge must decide if the allegations are true and, if so, whether civil penalties and "disgorgement" — or repayment of the ill-gotten profits — are appropriate.
In a separate incident two years ago, the then-Office of Thrift Supervision accused Feldman of improperly altering loan documents approved by a Pennsylvania bank. The federal regulator wanted to remove him from Eastern Savings, but Feldman settled last year, agreeing to corrective actions, including training and paying restitution of $230,000 to the bank and a $125,000 fine.
OptionsXpress said it, too, will fight the charges. Stephen Senderowitz, an attorney representing the company, said the firm covered the short sales in compliance with SEC rules.
"There was no downward pressure on prices. No one was defrauded. The trades were not shams," he said. "The trades had economic risk."
The scheme, according to the SEC, took place between October 2008 and March 2010. The firm and several customers, including Feldman, allegedly conducted sham transactions in several securities, including
Regulators said the transactions impacted the market for the companies. In one instance, customers who engaged in the activity, including Feldman, accounted for on average 47.9 percent of the Sears' daily trading volume in January 2010.
In 2009, according to the SEC, the six optionsXpress customer accounts combined bought $5.7 billion worth of securities and sold short about $4 billion of options.
The SEC said the transactions were profitable because customers took on no risk and did not incur costs associated with borrowing shares to execute the short sales. OptionsXpress received commissions on the transactions.
The complaint did not specify Feldman's alleged profit.
Also named in the complaint was the brokerage firm's former chief financial officer, Thomas E. Stern of Chicago.
Three other optionsXpress officials, who were named in a separate administrative proceeding, settled the charges against them without admitting or denying the SEC's findings. Peter J. Bottini, Phillip J. Hoeh and Kevin E. Strine agreed to cooperate with the SEC's investigation. The three men still work for the company, which was purchased by Charles Schwab in September.