Interesting Suit over Naked Shorting = Counterfit Stocks

Interesting to see how this plays out:

http://ir.lphi.com/releasedetail.cfm?ReleaseID=840355

Life Partners Sues Schwab Unit Over Naked Short Sales


Law360, Los Angeles (April 15, 2014, 9:19 PM ET) -- Life Partners Holdings Inc hit a Charles Schwab Corp subsidiary with a suit in Illinois court Tuesday, alleging the brokerage, its former chief financial officer and one of its biggest customers created “counterfeit-phantom stock” through their abusive naked short-selling.

Life Partners is basing its allegations on a June U.S. Securities and Exchange Commission ruling that optionsXpress Inc. committed securities fraud by selling hundreds of millions of dollars' worth of phantom stock, including nearly $5.5 million of Life Partners shares.

The suit claims that naked short sales — where traders do not actually borrow a stock even after executing a sale — creates counterfeit stock that enters the securities market much like counterfeit currency. The defendants doubled the amount of Life Partners stock through their short sales, the suit says.

The sales “whipsawed the price of the stock at their whim,” the suit says. “This causes and continues to cause erratic volatility of Life Partners stock.”

Life Partners is seeking an injunction barring the defendants from continuing to issue the phantom stock.

“This case isn’t about money. It’s about confidence in the market,” Life Partners CEO Brian Pardo said in a statement. “Without a stock certificate, we’ve seen how easy it is for Wall Street to pass off counterfeit stock in your account as legitimate, and we want to put a stop to it.”

Representatives for optionsXpress did not immediately respond to requests for comment Tuesday.

The SEC accused optionsXpress and four former and current employees of abusive naked short-selling in 2012. The agency said optionsXpress used sham “reset transactions” to hide the scheme involving several customers, including Jonathan I. Feldman, a bank executive who was also targeted in one of two SEC administrative actions.

Feldman and former optionsXpress CFO Thomas E. Stern were also named in Life Partners' suit.

The SEC claimed all violated Regulation SHO, which requires firms to back their securities trades with actual stock within three days of a trade, or borrow or purchase securities by the next day. The net effect of the transaction chain was to allow six customers, including Feldman, to keep an open short position, the SEC said.

An administrative law judge issued an initial decision June 7 in favor of the SEC, and ordered optionsXpress and Feldman to each pay a $2 million penalty. Stern was ordered to pay a $75,000 penalty.

On June 11, the agency reached a separate $6 million settlement with the Chicago Board Options Exchange over claims the stock exchange failed to properly oversee trading activities at optionsXpress and did not enforce rules against naked short-selling.

Stern and Feldman later argued that the SEC improperly withheld details of the CBOE settlement, which they claimed was inconsistent with the June 7 ruling.

But the commission ruled in October that the defendants had waited too long to request additional documents related to the settlement. The SEC also said Stern and Feldman did not show the documents were material and favorable to their defense.

The naked short-selling took place from at least October 2008 to March 2010, according to the SEC. Chicago-based optionsXpress was purchased by Charles Schwab in September 2011.

Life Partners is represented by Gary Aguirre of Aguirre Law PC and Hal J. Wood of Horwood Marcus & Berk Chtd.

Counsel information for the defendants was not immediately available.

The case is Life Partners Holdings Inc. et al. v. optionsXpress Inc. et al., case number 14CH6428, in the Circuit Court of the State of Illinois, County of Cook.

 

Thanks for posting; I think naked shorting and order internalization/off exchange activities are bigger problem than HFT and should be addressed first.

 

It seems like we'd be better off if more shorting activity in "difficult" circumstances where borrow isn't plentiful moved to SSF. Then this crap goes away.

 

Counterfeting stock was what struck me... never thought of it that way.
If you get caught counterfeiting Gucci you have to pay 2x the retail value.
Does that mean they have to pay 2x the share price as penalty?
Enforce a few of those cases and that would send a wake up call.