Reversing a ruling by one of its own judges, the U.S. Securities and Exchange Commission has cleared a Pikesville man of charges he participated in a short-selling scheme with the online brokerage optionsXpress.
In an administrative case brought in 2012 by the SEC's enforcement division, a judge ruled in 2013 that Jonathan Feldman, a former senior vice president at Eastern Savings Bank, violated SEC rules and committed fraud by engaging in so-called "abusive naked" short-selling. The SEC accused optionsXpress, now owned by Charles Schwab, of helping him sell shares of stock he did not borrow first and had no intention of closing out as required under SEC rules.
But after reviewing the judge's ruling, the commission determined that the SEC's division of enforcement had not met its burden in proving the case against Feldman. In an opinion issued Aug. 18, the commission said the case lacked evidence that Feldman intended to defraud, mislead or manipulate prices with his investment strategy, and that he did not violate rules regulating naked short selling.
"[T]he record does not contain sufficient evidence for us to find that Feldman failed to fulfill his own, distinct delivery obligations or that he otherwise violated the anti-fraud provisions," the commission wrote.
While the order also cleared optionsXpress of fraud, it did find that the firm violated SEC rules related to its responsibility to close out Feldman's transactions. The SEC ordered the firm to pay a civil penalty of $2 million and to disgorge about $1.5 million it made from the transactions plus interest.
"The Commission, in a rare action, reversed its Administrative Law Judge and held that optionsXpress did not violate anti-fraud provisions in closing out options trades for a single customer in 2009 and 2010," Charles Schwab said in a statement. "While very encouraged by the reversal of this aspect of the decision, optionsXpress is carefully evaluating its options in connection with the Commission's other finding that the process they used to close out the options trades violated the technical requirements of" the SEC rules.
In the statement, Schwab said optionsXpress believes that at all times it fully complied with those regulations.
Short selling is a legal investment practice in which investors try to make money by betting on a stock's value declining. Investors borrow shares of stock, sell them, then buy them back — hopefully at a lower price — to return to their owner.
Naked short selling involves selling shares the seller does not actually own and has not borrowed first. Out of concern that this kind of investing could manipulate prices, the SEC created rules that required sellers and their brokers to close out these short sales within a certain time period.
In its 2012 case, the SEC accused Feldman and optionsXpress of intentionally failing to close Feldman's naked short-sale transactions.
But in its latest opinion, the SEC said Feldman was not at fault because it is the broker's responsibility — not the seller's — to deliver on the sales.
The commission noted in its opinion that Feldman told optionsXpress about his strategy and discussed it publicly on a blog.
"He wasn't trying to mislead anyone — his trades were open," said Gregory T. Lawrence, Feldman's lawyer. "And his trades didn't somehow become fraudulent merely because the commission later concluded that his broker didn't comply with its obligations."
For Feldman, the decision is vindication after years of legal battle.
"I am gratified to have been completely vindicated — the just result which I, along with my counsel, family and friends, knew with absolute certainty that I deserved," Feldman said in a statement. "We knew I'd done everything right and nothing wrong."
Though the SEC case was related to Feldman's private trading, he stepped down from his position at Hunt Valley-based Eastern Savings Bank shortly after the SEC's accusations in 2012 and went into business for himself, trading his own private accounts.
In an interview, Feldman said he has done well on his own, but that the SEC charges haven't made it easy.
Brokerage firms froze Feldman's accounts, banks closed out his savings accounts, and he even had a credit card canceled on him, Feldman said.
He said the commission's decision is both gratifying and disturbing.
"You can't be bitter and angry every day," he said. "I was definitely motivated to fight it, but it wasn't something I was going to let define me."