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The Charles Schwab Corporation : SEC Charges OptionsXpress In Naked Short Selling Scheme

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04/17/2012 | 03:14am CEST

--Regulators charge optionsXpress, five others in short-selling scheme

--OptionsXpress, customer and former officer contest charges

--Three optionsXpress officials settle charges against them for their alleged roles in the scheme

(Updates with comments in the eighth paragraph from Gregory Lawrence, Jonathan Feldman's attorney.)

 
   By Chris Dieterich and Brett Philbin 
   OF  
 

The Securities and Exchange Commission charged online brokerage optionsXpress on Monday, as well as four of the firm's present and former officials and a customer, in an alleged scheme involving so-called "naked short-selling."

The SEC alleges Chicago-based optionsXpress and its customer, Jonathan I. Feldman, repeatedly engaged in a series of sham "reset" transactions designed to give the illusion the firm had bought certain securities.

Short-sellers borrow shares from other investors and sell them in the hope of buying them back at a lower price later. In a naked short sale, an investor sells stock without having the borrowed shares to deliver to the buyer.

Regulation SHO, a package of SEC rules aimed at cracking down on naked short-selling, requires shares to be delivered generally three days after the trade date.

"Feldman and optionsXpress used sham reset transactions to avoid, sometimes for months, compliance with Reg. SHO's stock delivery requirements," Robert Khuzami, director of the SEC's Division of Enforcement, said in a release.

The SEC also named the firm's former chief financial officer, Thomas Stern, in its administrative proceeding, along with Feldman.

Three other optionsXpress officials--Peter Bottini, Phillip Hoeh and Kevin Strine--settled charges against them for their alleged roles in the scheme in a separate administrative proceeding, according to the SEC. They didn't admit or deny wrongdoing and are still employed by optionsExpress.

"Mr. Feldman was entering into legitimate transactions. A sham transaction requires a confederate, a counterparty who's colluding with you. These were market transactions: you enter and order, put it out there, and somebody bites," said Gregory Lawrence, Feldman's attorney, at Conti Fenn & Lawrence LLC in Baltimore.

Steve Senderowitz, a partner at law firm Winston & Strawn LLP representing optionsXpress, said, "We believe the evidence at trial will demonstrate that optionsXpress timely covered, consistent with Regulation SHO, that its executives were in touch with regulators about the trades, that there was no downward pressure on prices, that no one was defrauded, that the trades were not shams, that they had economic risk and economic purpose and were neither novel or exotic."

OptionsXpress was acquired by Charles Schwab Corp. (SCHW) in September 2011.

"This was a situation that occurred before Schwab acquired optionsXpress. Schwab has cooperated with the investigation and looks forward to its being resolved," according to a company spokesman.

-By Chris Dieterich, Dow Jones Newswires; 212-416-2611; [email protected]

--Nathalie Tadena contributed to this report.

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