April 19 (Bloomberg) -- optionsXpress Inc., its former chief financial officer and an affiliated dealer were accused by U.S. regulators of violating securities laws by skirting registration requirements in order to avoid an audit.
The U.S. Securities and Exchange Commission action, filed today in administrative court in Washington, is the agency’s second against OptionsXpress and Thomas E. Stern this week. They were named in an April 16 enforcement case accusing them of engaging in a scheme to allow illegal short sales.
OX Trading LLC violated two regulatory requirements by trading through an optionsXpress customer account after ending its membership with the Chicago Board Options Exchange and its SEC brokerage registration, the agency said. The optionsXpress affiliate was an unregistered dealer from October 2009 to November 2010 and traded without being a member of a national association or exchange beginning in March 2009, the SEC said.
After regulators questioned the firm’s registration status and said it should be audited, Stern, who was also OX Trading’s chief compliance officer, responded with a letter containing numerous factual inaccuracies and no legal opinion or analysis, the SEC said. He later fabricated and backdated a letter in 2011 to indicate he had properly informed regulators that OX Trading would de-register and become an optionsXpress customer, according to the order.
“optionsXpress, OX Trading, and Stern have displayed a profound disregard for regulators, compliance obligations, and the regulatory requirements that dealers must satisfy,” Daniel Hawke, head of the SEC’s market-abuse unit, said in a statement. “Registration of brokers and dealers is a fundamental part of the regulatory structure and provides the foundation upon which other investor protections are built.”
Stephen Senderowitz, an attorney for the firms, said OX Trading believed registration wasn’t required because it was acting as a proprietary trading firm and had no customers.
“The issue that will be presented to the Administrative Law Judge is whether a trading entity whose principal function was to provide price improvement for its affiliate’s customers acted as a dealer, which required registration, or as a proprietary trading firm, which did not,” Senderowitz said in an e-mailed statement. “OptionsXpress is a separate entity, had nothing to do with OX Trading’s registration and does not belong in this case.”
No Clear Guidance
Vincent Schmeltz, Stern’s attorney, said there’s no clear regulatory guidance on whether a firm such as OX Trading, which wasn’t trading client money, needs to be registered as a broker- dealer.
“We don’t believe that the facts merit the same result as the SEC, and we look forward to proving that at trial,” Schmeltz said.
Charles Schwab, the San Francisco-based brokerage, agreed to buy OptionsXpress for about $1 billion in stock last year, adding the retail options brokerage founded in 2000 to its equity and mutual fund offerings. The acquisition was completed in September.
OX Trading was recently closed in anticipation of the Volcker rule, Senderowitz said. The rule, named for former Federal Reserve Board Chairman Paul Volcker, would ban banks from trading with their own funds.
OX Trading was created to execute orders for optionsXpress customers at better prices than the public quote at the time the market center received the order, the SEC said. Generally, a computerized system would automatically determine whether OX Trading would be a counterparty to the trades. OX Trading made money by hedging the positions created by those trades, the SEC said.