On Monday, the Securities and Exchange Commission (SEC) charged
optionsXpress Holdings Inc. with repeatedly indulging in deceptive
short-sale transactions in the past. OptionsXpress, a Chicago-based
retail online brokerage company was acquired by
Charles Schwab Corporation
(
SCHW
) in September 2011 for $1.0 billion.
Reason Behind the Allegation
The SEC claimed that optionsXpress failed to comply with the
Regulation SHO of the Exchange Act, according to which, the brokers
are required to settle the customer's short sale transactions by
buying and delivering the stock within three days. According to the
SEC, optionsXpress deliberately created the impression of
closing-out the short sale obligations without actually delivering
the stock.
Call options were sold simultaneously with the buying of shares
to create the delusion of settlement of the sale. However, the
purchased shares were never delivered to the buyer. Instead, the
call options were exercised on the day of share purchase and the
shares were resold without actually getting delivered to the
original buyer, which contradict the securities law of the SEC.
From October 2008 through March 2010, before optionsXpress was
acquired by Schwab, these short sales were allegedly carried out by
optionsXpress in several securities of firms such as
Sears Holdings Corporation
(
SHLD
),
American International Group
,
Inc.
(
AIG
) and
Chipotle Mexican Grill, Inc.
(
CMG
).
Impact of the Deception
In January 2010, the customers involved in the misleading trades
of optionsXpress accounted for, on average, 47.9% of the daily
trading volume, affecting the market for the issuers.
Moreover, six customer accounts in optionsXpress bought nearly
$5.7 billion worth of securities and sold short about $4 billion of
call options in 2009. An accused customer, Feldman himself
purchased $2.9 billion of securities and sold short nearly $1.7
billion of options through his account at optionsXpress.
The SEC believes that optionsXpress and the involved customers
earned profits at the cost of the true buyers by not delivering the
shares.
Implications
Though, optionsXpress has been charged for misconduct in the
short sale transactions carried out by it prior to its merger, the
consequences of these charges will have to be faced by Schwab in
the form of elevated legal expenses. Moreover, this lawsuit may
compel the clients to reconsider their business relations with the
company, which can substantially hurt its goodwill and in turn, its
profitability.
Currently, Schwab retains a Zacks #2 Rank, which translates into
a short-term Buy rating.
AMER INTL GRP (
AIG
): Free Stock Analysis Report
CHIPOTLE MEXICN (
CMG
): Free Stock Analysis Report
SCHWAB(CHAS) (
SCHW
): Free Stock Analysis Report
SEARS HLDG CP (
SHLD
): Free Stock Analysis Report
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