The SEC’s Division of Enforcement said that optionsXpress failed to satisfy its close-out obligations under Regulation SHO by engaging in a series of sham "reset" transactions, which falsely reflected that the firm had purchased securities of like kind and quantity.
As per the existing SHO regulation, the delivery of equity securities to a registered clearing agency is vital when delivery is due, generally three days after the trade date (T+3) and if delivery is not provided, 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).
The complaint names Thomas Stern former chief financial officer at optionsXpress, Peter Bottini -head of trading and customer service, Phillip Hoeh and Kevin Strine- compliance officers, as accused of the fraud.
SEC Enforcement Division director Robert Khuzami said that 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," Khuzami said.
The federal regulator said that misconduct occurred before Charles Schwab bought the company in late 2011.
The incident happened for at least the 18 months between October 2008 and March 2010, according to the SEC.
The SEC’s Enforcement Division alleged that the sham reset transactions impacted the market for the issuers.
