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Saturday, April 21, 2012
SEC CHARGES CHICAGO-BASED SECURITIES DEALER WITH VIOLATION OF REGISTRATION REQUIREMENTS
Washington, D.C., April 19, 2012 – The Securities and Exchange Commission today charged a Chicago-based securities dealer affiliated with online brokerage firm optionsXpress with violating the registration provisions of the securities laws when it continued trading operations after delisting from the Chicago Board Options Exchange (CBOE) and deregistering with the SEC, apparently to avoid an audit.
The SEC’s Division of Enforcement instituted administrative proceedings against OX Trading LLC, optionsXpress, and their former CFO Thomas E. Stern, alleging that OX Trading operated as an unregistered dealer from October 2009 to November 2010 and illegally transacted in securities while not a member of a national securities association or national exchange from March 2009 to November 2010.
According to the SEC’s order, Stern terminated OX Trading’s membership with the CBOE and ended the firm’s broker-dealer registration with the SEC. Meanwhile, OX Trading quietly continued to conduct trading through a customer account at optionsXpress. Stern, who also was OX Trading’s chief compliance officer, later fabricated and backdated an allegedly exculpatory letter purporting to demonstrate that he had properly informed CBOE that OX Trading would deregister and become a customer of optionsXpress.
Earlier this week, the SEC charged optionsXpress and Stern for their roles in a naked short selling scheme.
“OptionsXpress, OX Trading, and Stern have displayed a profound disregard for regulators, compliance obligations, and the regulatory requirements that dealers must satisfy for the privilege of operating in our markets,” said Daniel M. Hawke, Chief of the SEC’s Market Abuse Unit. “Registration of brokers and dealers is a fundamental part of the regulatory structure and provides the foundation upon which many other investor protections are built.”
According to the SEC’s order, OX Trading and optionsXpress became wholly-owned subsidiaries of The Charles Schwab Corporation in September 2011. OX Trading, which originally registered with the SEC in 2008, was created to provide price improvement on orders from optionsXpress customers and to profit from those trades. OX Trading received electronic requests for quotes (RFQs) from optionsXpress. These RFQs allowed OX Trading to determine whether it wanted to be the counterparty to an optionsXpress customer’s order. OX Trading allegedly made money when it traded as a counterparty to optionsXpress customer orders and hedged the positions created by those trades.
According to the SEC’s order, a CBOE examiner conveyed to Stern in early 2009 that OX Trading was required to have an annual audit based on its CBOE membership status. Despite CBOE’s request, Stern refused to pay for an audit and subsequently terminated OX Trading’s CBOE membership on March 2, 2009. Nonetheless, OX Trading continued to conduct the same trading through a customer portfolio margin account at optionsXpress. Stern did not inform the CBOE that OX Trading would continue its operations as a customer of optionsXpress. He later attempted to furnish the fabricated and backdated letter to SEC investigators in a phony attempt to prove otherwise.
According to the SEC’s order, after Stern was contacted by the SEC’s Division of Trading and Markets, Stern filed a form with the SEC on Aug. 18, 2009, to deregister OX Trading as a broker-dealer. The deregistration became effective on Oct. 17, 2009. According to an internal e-mail sent by Stern, OX Trading “stalled as long as we could” in deregistering. OX Trading continued to trade through the customer portfolio margin account at optionsXpress.
The SEC’s Division of Enforcement alleges that CBOE identified the OX Trading customer account during an exam of optionsXpress in late 2009. CBOE requested an explanation about why OX Trading was not registered with the SEC as a broker-dealer. In an internal e-mail about CBOE’s request, Stern stated, “I am happy to spin this however it needs to be.” Stern then sent CBOE a letter containing numerous factual inaccuracies and no legal opinion or analysis about OX Trading’s registration status. CBOE sent Stern another letter in June 2010 informing him that it believed OX Trading was functioning as a dealer and needed to either cease operations or obtain a written opinion from the SEC confirming that OX Trading was not required to register. OX Trading did neither.
According to the SEC’s order, OX Trading eventually acquired a CBOE trading permit and registered again with the SEC effective Nov. 16, 2010.
As alleged in the SEC’s order, OX Trading violated Sections 15(a) and 15(b)(8) of the Exchange Act, and Stern and optionsXpress caused and willfully aided and abetted OX Trading’s violations.
The SEC’s investigation was conducted by Deborah Tarasevich, Jill Henderson, and Paul Kim. Market Surveillance Specialist Brian Shute and Market Abuse Trading Specialist Ainsley Fuhr provided assistance with the investigation. The SEC’s litigation will be led by Frederick Block.
Labels: ALLEGED NAKED SHORT SALES, ALLEGED OPERATING AS AN UNREGISTERED DEALER IN SECURITIES, CHICAGO BOARD OPTIONS EXCHANGE