On Thursday, the Securities and Exchange Commission accused the firm’s trading arm, OX Trading LLC, with continuing its 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 alleges OX Trading, under the direction of former optionsXpress CFO Thomas Stern, 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.
Schwab’s outside counsel handling the matter, Stephen Senderowitz of the law frim Winston & Strawn LLP, said OX Trading “was closed in anticipation of the implementation of the Volcker rule.”
In a statement to AdvisorOne, he also pointed out that optionsXpress fired Stern after an investigation. “The allegations against Mr. Stern relating to his post-registration conduct that are contained in the order were self-reported by the company,” Senderowitz said in the statement.
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.
This is the second spate of bad news for the company in as many days. Earlier this week, the SEC charged optionsXpress, as well as Stern, three other officials at the firm and a customer in an alleged abusive naked short-selling scheme.
In the latest announcement, Daniel Hawke, chief of the SEC’s market abuse unit, said: “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. 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 Corp. (SCHW) in September. 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.
The SEC’s order claims 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 later attempted to furnish the fabricated and backdated letter to SEC investigators in an attempt to prove otherwise.