It's really not as complex as the SEC makes it out to be.
Given that the securities underlying the call options Feldman was writing were on the Reg SHO list, when those call options were getting exercised overnight, OptionsExpress(OX) was supposed to buy-in the resulting short stock position AT the market open. And, in fact, they forced their other, smaller customers who were pursuing the same strategy to buy-in at the open.
However, Feldman was a larger customer. And instead of forcing him to buy-in at the open, they afforded him time to arrange "buy-writes" after the market opened to cover the short stock positions and re-establish the short call position he wanted to hold.
By giving him time to arrange his "buy-write" trades, they let Feldman off the hook for the risk that the stock would slide immediately after the open, which often happened, and therefore let him re-establish his short position in the calls at relatively more advantageous prices. The rest of the OX customers who were writing deep-in-the-money calls had to eat the risk.
"The penny stock investor may be the most dangerous creature in the investment world, at least to himself.[...]His hypocrisy becomes most apparent when he then blames his losses on the greed of others." Robert C. Dugan, Director - JRM Capital
