“OptionsXpress believes that Reg SHO did not prohibit the transactions at issue here, and that the evidence showed there was no naked short selling as OptionsXpress timely bought in all shorts and delivered securities as required by regulations,” added Senderowitz, a lawyer at Winston & Strawn LLP.
The SEC settled related claims against three OptionsXpress employees: Peter Bottini, Phillip Hoeh and Kevin Strine, according to a separate administrative order.
Feldman used OptionsXpress to target companies where demand to sell short was so high that it was difficult or expensive to borrow shares. To get around that, synthetic short bets were created by selling bullish options priced far below the level of the stock, known as deep-in-the-money calls.
“Whenever the deep-in-the-money call options that Feldman wrote were assigned to him, Feldman ended up in a short position,” Murray said in the judgment. “This would have been true for any trader. What was different for Feldman and certain other customers was that it was not an infrequent or unplanned occurrence, rather it was their deliberate and consistent trading practice.”
Five customers including Feldman used the strategy between October 2008 and March 2010 on about 25 stocks, including Sears Holdings Corp. and American International Group Inc., the SEC said. In 2009, they bought about $5.7 billion of securities and sold about $4 billion of options, the regulator alleged.
Feldman’s trades, involving at least $2.9 billion of purchases and $1.7 billion of options, occurred between July 2009 and March 2010, the SEC alleged. Feldman estimated he made $3 million to $4 million on the trades he did through OptionsXpress, according to the judgment.
At one point, according to the judgment, Feldman messaged Dean Kolocouris, a friend who was also alleged to have engaged in the practice: “read the latest thread on the [Sears] ‘volume spikes.’ Very entertaining. (Until someone notifies the SEC, and they shut down the strategy!! Then we’ll need a real job.”