OptionsXpress didn’t levy extra fees on hard-to-borrow stock and was alone at the time in allowing the use of buy- writes to cover short positions, according to Judge Murray’s ruling.
“Feldman’s actions constitute fraud because by writing calls he represented to the market as a whole and to purchasers of his deep-in-the-money calls that he was going to make delivery if his calls were exercised and assigned when he had no intention of doing so, and, in fact, by entering buy-writes, he did not cover his short position,” Judge Murray said.
Charles Schwab, the San Francisco-based brokerage, agreed to buy OptionsXpress for about $1 billion of stock in 2011, adding the retail options brokerage founded in 2000 to its equity and mutual fund offerings. The acquisition was completed in September 2011.
OptionsXpress claimed to have 320,000 customers in 2010, according to the judgment.
The company knew the stocks purporting to cover the short positions were committed to call options that “would be exercised and assigned so that no shares were delivered,” the judge wrote. Stern knew, or was reckless in not knowing, that the transactions violated securities statutes, Murray said.
Feldman was senior vice president and chief lending officer at a regional bank until resigning in April 2012 and was one of OptionsXpress’s biggest customers, according to the judgment. He maintained that he relied on OptionsXpress to know the rules and follow them, the judgment said. That argument was inapplicable, the judge said.
“Sophisticated traders cannot do transactions that they knew, or were reckless in not knowing, were illegal and then blame their broker who they knew had a substantial financial interest in continuing the transactions,” Murray said.