SEC throws out short-selling fraud case against banker
By Suzanne Barlyn
(Reuters) – The U.S. Securities and Exchange Commission, in a rare reversal of a decision by one of its in-house judges, said on Friday it threw out a case against a Maryland-based banker it had accused of taking part in a short selling fraud with online brokerage optionsXpress.
“The record and law does not support” the agency’s case against the banker, Jonathan Feldman, the three member-commission wrote in an opinion dated Thursday and released on Friday.
The ruling overturns a 2013 decision by SEC Chief Administrative Judge Brenda Murray, who found Feldman liable and ordered him to pay $4.7 million in penalties. The ruling also threw out a finding that optionsXpress aided Feldman but the firm must still pay a $3.6 million penalty for technical violations.
Feldman was an optionsXpress Inc customer when he was charged by the SEC in 2012 for a so-called “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.
The SEC had accused Feldman of trading billions of dollars in options and stocks using sham transactions that misled other investors. The agency said the transactions, facilitated by optionsXpress, were intended to skirt a regulation that requires the stocks to be delivered generally three days after the date of a trade. optionsXpress is now owned by Charles Schwab Corp..
The ruling in Feldman’s favor marks a rare divide between the SEC, its enforcement unit, and its in-house judges. It comes about a week after a U.S. appeals court, in an unrelated case, upheld the SEC’s use of in-house judges.
Critics of the SEC administrative courts say respondents in the cases have fewer due process rights than in federal court.
In throwing out the case against Feldman, the commissioners ruled that the enforcement division did not present “sufficient evidence” to prove manipulation or fraud.
The brokerage was encouraged by the reversal and is evaluating its options in connection with the finding that it violated “technical requirements” of the rule, said Charles Schwab spokesman Greg Gable. “optionsXpress believes that at all times it fully complied with the technical close out obligations” under the rule, Gable said.
Feldman, who now runs his own investment management firm in Maryland, and his lawyer could not be immediately reached for comment.
An SEC spokeswoman declined to comment.
(Reporting by Suzanne Barlyn; Editing by David Gregorio)