SEC Charges OptionsXpress with Naked Short Selling Scam

And the fails just keep on coming.

MF Global was check-kiting (in addition to outright theft) and OptionsXpress was 'stock kiting' in some targeted and fairly impressive volumes.

Their mistake was involving the retail side of the trade.   Naked short selling and price manipulation is only permitted for professionals of TBTF institutions and  campaign contributing hedge funds.

Bloomberg
OptionsXpress Accused by SEC of Naked Short-Sale Violations
By Joshua Gallu
Apr 16, 2012 5:15 PM ET

OptionsXpress Inc. (OXPS), the Chicago brokerage acquired by Charles Schwab Corp. (SCHW) last year, was accused by U.S. regulators of using sham “reset” transactions as part of an abusive naked short-selling scheme.

The company and four executives violated Securities and Exchange Commission rules in conducting trades from at least October 2008 to March 2010 designed to give the illusion of compliance with rules governing short sales, the SEC said in a statement today. An OptionsXpress customer was also accused by the SEC of participating in the alleged violations.

In a short sale, an investor borrows shares and sells them with the goal of profiting from a price decline by repurchasing at a lower price and repaying the loan. The SEC’s Regulation SHO requires brokers to close out clients’ short sales within three days and bars them from executing further bets against individual companies until previous sales have been settled.

OptionsXpress, its former chief financial officer Thomas Stern and the customer, Jonathan Feldman, are fighting the agency’s claims, which were filed in administrative court in Washington today...

OptionsXpress helped its customers buy shares while simultaneously selling call options that were essentially the economic equivalent of selling shares short, the SEC said. The purchase of shares created the illusion that the firm had satisfied the close-out obligation even though they were never actually delivered to the purchasers, according to the order.
Stock-Kiting Scheme

The transactions allowed OptionsXpress and its customers to engage in a “stock-kiting scheme” that deprived true stock purchasers of the benefits of ownership, the SEC said in its order. OptionsXpress had repeated failures to deliver stock in firms including Sears Holdings Corp. (SHLD), American International Group Inc. (AIG) and Chipotle Mexican Grill Inc. (CMG), according to the order.

In January 2010, customers involved in the OptionsExpress trades accounted for an average of 48 percent of daily trading volume in Sears, the SEC said. In 2009, six OptionsXpress accounts purchased about $5.7 billion worth of securities and sold short about $4 billion of options, according to the order.

The SEC settled related claims against three OptionsXpress employees: Peter Bottini, Phillip Hoeh and Kevin Strine, according to a separate administrative order filed today. Attorneys for Strine and Hoeh declined to comment. A phone call to Steven Biskupic, a lawyer for Bottini, wasn’t immediately returned.

In resolving the action, Bottini, Hoeh and Strine agreed to cooperate with the SEC’s investigation without admitting or denying wrongdoing or paying any financial penalties.

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.

Gold Daily and Silver Weekly Charts

Gold closed about where it had opened on Sunday evening, and silver closed slightly higher.

And yet the miners took a minor beating as it were.

SP 500 and NDX Futures Daily Charts - No Resolution Yet

There was no clear breakout or breakdown on stocks.

There is also a strong possibility that we move to a sideways chop from here to the next big market move in May.

Why Has the American Economic System Failed, and What Are We Going To Do About It?

"We always want to keep in mind what the function, the purpose, of the economy is. The purpose of an economy is not producing GDP. It is increasing the welfare of citizens, and it is increasing the welfare of most citizens. And the American economic system has failed, and failed very badly. Most Americans today are worse off, most American households have lower real income adjusted for inflation than they had fifteen years ago."

Joe Stiglitz made an aside about half way through his talk about mercantilism at INET Berlin this month that is worth noting. I like the way he frames the problems and his fresh look on the situation but do not favor many of his suggested cures, especially the notion of something that sounds dangerously like central planning by a financial elite. I think that is something that needs much more work, but that is a discussion too often impeded by denial, misdirection, and diversion.

Although he initially addresses his talk to America, he goes on to include other countries, especially Germany. I would add the UK, among others including China, which is a disaster in the making.

I start the tape of his talk at 13:25, so you can hear the basic question and the simple truth that so many have overlooked. The American economic system has failed the public, and that failure has its roots in the 1990's, accelerating at the turn of the century into the financial collapse. It is a story of deceit, corruption, and betrayal.

And the majority of the people, who have suffered the most from this injustice, are being asked to suffer even more for a system that does not benefit them and actually works against them. And they are asking, 'is it worthy of our support?'

And history indicates that they will provide an answer that may be unpalatable for those who benefit the most from the current unsustainable arrangement, who are enriched by the misery of others.

I cannot say it more simply or more emphatically, that the gaming of the system by the monied interests, marked by but not wholly due to the repeal of Glass-Steagall, the trade agreement with China without a floating exchange rate, and the Bush tax cuts for the wealthy while initiating aggressive war on multiple fronts, have set the American economy on a spiral of demise and eventual self-destruction.

What has institutionalized this demise and made it pernicious is the corruption of American power and distortion of thought by big money, and the short term selfishness and self-interest of the status quo. That is what I call the credibility trap.

The point must be made, that the system did not fail because our economic models were no good, that our financial leaders were simply mistaken, that the political powers were pursuing the right path but that things went wrong in ways that no one could have foreseen, and that even now, the thought leaders and spokesmodels for the monied interests are hard at work concealing and deceiving and misleading, feeding the rotten system that has brought us to where we are today.

It was never a mistake. They knew, but it was easier to go along or do nothing, being either craven or compromised. It was always about easy money, and the fraud.

Giving even more money to the Banks, and asking the people to pay for it, in the hope that it will eventually trickle down to the people from whom it has been stolen is not a policy, and not even a policy failure. It is an obscenity.

I sense we are in the negotiation phase, in which the powerful monied interests want to be let off with a wrist slap, and no admission of guilt.  And of course for change to come slowly, maximizing their returns. 

The powerful think that they are the system, the economy and the government, and that it exists to serve them. And so any change must suit their needs, first and above all. But a prideful greed and will to power can never really contain itself, as it can never be truly satiated. It always craves just a little more.

The existing US dollar trade regime dominated by global corporations and banks, backed by widely deployed military power, is not sustainable. We are entering the next phase of this unfolding crisis, and some countries are already there, in which we will see growing domestic unrest and repression, and regional trade wars and alliances, in the evolution of the ongoing currency war.

Reform will come, one way or the other.   The writing is on the wall.

For in that universal call,
Few bankers will to heaven be mounters;
They'll cry, "Ye shops, upon us fall!
Conceal and cover us, ye counters!

When other hands the scales shall hold,
And they, in men's and angels' sight
Produced with all their bills and gold,
'Weigh'd in the balance and found light!'

Jonathan Swift, The Run on the Bankers