OptionsXpress says Life Partners' allegations are "completely unfounded."

Life Partners Holdings (LPHI) said Wednesday that it has filed suit in Illinois against optionsXpress, the company’s ex-chief financial officer, and one of its top customers for issuing and selling counterfeit shares of Life Partners Holdings’ stock.

The Chicago-based options brokerage firm is now owned by Charles Schwab (SCHW), which says it “did not own optionsXpress at the time of the trading at issue and was not named in the complaint.”

Life Partners based its case on last year’s SEC proceedings, which concluded that optionsXpress, then-CFO Thomas E. Stern and client Jonathan I. Feldman “committed securities fraud by engaging in the sales of hundreds of millions of dollars in counterfeit-phantom stock passed off as the genuine stock of 25 public companies, including almost $5.5 million of counterfeit-phantom stock of Life Partners Holdings Inc.,” the life-settlements group says in a press release.

The SEC’s case involved five customers, including Feldman, who used this strategy, known as naked short selling, from late 2008 to early 2010 on about 25 stocks, including Sears (SHLD) and AIG (AIG), according to regulators.

In 2009, for instance, they bought about $5.7 billion of securities and sold about $4 billion of options. Feldman’s trades involved some $2.9 billion of purchases and $1.7 billion of options; they took place between July 2009 and March 2010.

The judge in the 2013 case ordered optionsXpress to pay some $3.6 million and Feldman to pay nearly $4.7 million. Stern, who was fired in 2012, was asked to pay $75,000; he was banned from the securities industry. 

Charles Schwab agreed to buy optionsXpress in March 2011 for $1 billion. The deal closed in September 2011.

The San Francisco-based company says Life Partners’ allegations related to the issuing and selling of counterfeit shares of Life Partners Holdings stock are “completely unfounded and without merit. OptionsXpress intends to vigorously defend against the lawsuit and expects to win.”

Options of Life Partners’ security were traded, and shares were purchased “in the normal course of business on registered securities exchanges,” adds Schwab, in a statement. “An SEC expert who already looked at the trading in this matter has testified that the type of trading done by the optionsXpress customer had no adverse impact on share price.”

Life Partners, though, insists that optionXpress’ activities have hurt Main Street. “Individual investors need to know that the stock they are buying is real and not phantom stock cooked up by Wall Street insiders. 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,” said CEO Brian Pardo, in a press release.

Check out SEC Charges OptionsXpress in Naked Short Selling Scheme on ThinkAdvisor.