The Authoritative NSS Page

[Stock]

This exchange is sad. They knew what they were supposed to do, but did not carry it out.

There must have been a ton of fees involved here. A lot of b/d revenue.

The SEC left them hung out to dry... and the SEC just hung them today...

http://www.sec.gov/litigation/admin/2012/34-66814.pdf

Communications with the Regulators

30. On September 23, 2009, optionsXpress received a letter of caution from CBOE. CBOE noted that optionsXpress conducted buy-ins on the morning of T+4, but found that the firm called certain customers prior to the execution of those buy-ins, which was a deviation from optionsXpress’ procedures. That deviation allowed the Customers to buy themselves in with a buy-write. In response to CBOE’s concerns, optionsXpress began emailing the Customers, instead of calling them. Otherwise, there were no changes to the procedures and optionsXpress continued to execute the Customers’ buy-writes.

31. On that same day, an optionsXpress trader forwarded a copy of the Hazan order to Bottini, citing the language about sham transactions. The trader then stated: “I am not placing any orders today.” Bottini responded minutes later: “Please execute the buy ins and customer orders today. Compliance has reviewed and is not convinced this applies. They have asked our regulator for an opinion and have not received it.” Later that day, Strine emailed Hoeh, Bottini, the CFO, and other senior executives regarding Hazan: “We addressed this issue back in August when the SEC issued its findings in these cases. Although I see issues with what our customers are doing, I pointed out distinguishing factors in my response back in August. . . . Additionally, we have responded to four inquiries regarding this issue: one from CBOE and three from FINRA. While the FINRA issues are still ongoing, CBOE didn’t seem to have any issues with our response.” The Clearing Department also contacted Strine noting that Strine and Hoeh had previously addressed the issue by saying buy-writes were not allowed: “Don’t want to get anyone in trouble, but somewhere down the road this is going to bite us.”

32. On September 24, 2009, Hoeh, Strine, the CFO, and optionsXpress’ in-house counsel called FINRA to ask questions about the Customers’ trading. FINRA said it would not discuss the issue because of its ongoing inquiry. The same day, the same four individuals (including Hoeh and Strine) called the SEC’s Division of Trading and Markets (“Trading & Markets”). According to optionsXpress, Trading & Markets told optionsXpress to “keep doing what you’re doing—keep closing out” and that Trading & Markets would get back to optionsXpress on the best execution question.

33. After the call, upon further investigation, Trading & Markets learned additional facts that optionsXpress did not disclose on the call, including that FINRA had an open inquiry and that the customers were using deep-in the-money calls to circumvent Reg. SHO. As a result, on October 2, 2009, Trading & Markets called optionsXpress and spoke to its in-house counsel and the CFO, telling them that the SEC declined to get involved and that it could provide optionsXpress with “no comfort.” optionsXpress’ in-house counsel informed Bottini, Hoeh, and Strine of the call.

34. After the October 2, 2009 call with Trading & Markets, Hoeh, Strine, the CFO, and in-house counsel called FINRA. optionsXpress told FINRA that it had received a call from the SEC, and that the SEC had declined to be involved. optionsXpress also said that it was at a loss about what to do and was seeking guidance on the activity. FINRA told optionsXpress that if it wanted guidance, it should send a request in writing to FINRA’s general counsel or the SEC. optionsXpress did not submit a written request for guidance to either the SEC or FINRA’s general counsel. Instead, optionsXpress continued executing the Customers’ buy-writes.

35. Two weeks after the October 2, 2009 call, Strine emailed several optionsXpress employees, including Hoeh, about another Reg. SHO issue and noted that “[w]e are already under heavy scrutiny from regulators on our short sale practices, and this problem could push us over the edge.”