WASHINGTON - U.S. securities regulators on Thursday charged an affiliate of online brokerage optionsXpress with violating requirements that it must be a registered dealer to engage in trading.
The administrative action, which also names optionsXpress, came just days after the online brokerage was separately charged by regulators with involvement in a so-called naked short-selling scheme.
OX Trading LLC, a securities dealer affiliated with optionsXpress, continued trading operations after terminating its listing with the Chicago Board Options Exchange and deregistering with the U.S. Securities and Exchange Commission, the SEC said.
The securities dealer delisted to avoid an audit, the SEC said.
The SEC charged OX Trading, optionsXpress and their former chief financial officer, Thomas Stern, and accused OX Trading of operating as an unregistered dealer between October 2009 and November 2010, and trading while not registered as a member of CBOE between March 2009 to November 2010.
"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, who heads the SEC's market abuse unit.
A lawyer for optionsXpress, Stephen Senderowitz, said OX Trading was formed as a proprietary trading firm to provide better pricing to optionsXpress customers, and terminated its CBOE and SEC registrations as a broker-dealer because it had no customer accounts of its own.
Senderowitz also said that OX Trading re-registered as a dealer with the CBOE after the exchange said it disagreed with the earlier decision to delist.
The SEC, for its part, said the CBOE sent a letter to Stern stating that the CBOE believed OX Trading was functioning as a dealer and was required to register as a broker-dealer.
OptionsXpress shut down OX Trading in February, Senderowitz said, in anticipation of the implementation of the Volcker rule, which bars banks from proprietary trading.
On Monday the SEC accused optionsXpress and five individuals of participating in a series of "sham transactions" to further a naked short-selling scheme.
Short sellers sell borrowed shares in the hope they can be bought back at a lower price. Naked short-selling involves selling shares without first borrowing them.
In its Thursday lawsuit, the SEC said OX Trading removed its CBOE membership after learning it would need to conduct an annual audit in order to remain on the exchange.
But after removing its listing, OX Trading continued to trade through a customer account at optionsXpress, and did not inform CBOE about the continued trading, the SEC said.
Stern, who was also OX Trading's chief compliance officer, "fabricated and backdated" a letter that demonstrated he had informed CBOE about the trading, the SEC said, though the letter was never submitted to the agency.
Senderowitz said the company provided information about the issue to the SEC and that Stern has since been let go.
A lawyer for Stern, Vincent Schmeltz, said there is "no clear guidance" requiring a firm like OX Trading to be registered, and that Stern had used his judgment and experience to determine the firm did not need to be registered.
Schmeltz also said the issue of the Stern letter was unrelated to the SEC's case.
Charles Schwab Corp acquired OX Trading and optionsXpress in September 2011. (Reporting By Aruna Viswanatha; editing by John Wallace)
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