WASHINGTON Jan 31 Two Florida State University
professors who specialize in financial markets and physics will
pay more than $670,000 to settle civil charges that they carried
out an illegal short-selling scheme using an elaborate options
strategy, U.S. regulators said on Friday.
Gonul Colak and Milen Kostov settled with the Securities and
Exchange Commission without admitting or denying the charges.
The SEC said the pair of researchers illegally reaped
$420,000 through a complicated "naked" short-selling strategy in
20 different companies, including Sears Holding Corp
and LinkedIn, among others.
Short-selling itself is not illegal.
In a short-sale, a trader borrows stock and then sells it at
a lower price to turn a profit. SEC rules require that the
securities must be repurchased within three days of the sale.
But the SEC said the professors engaged in illegal "naked"
short-selling, in which they never actually borrowed the
securities and failed to deliver them.
In this particular case, the SEC alleges the two engaged in
so-called "sham transactions designed to perpetuate a naked
Their alleged scam made it appear as though they had
actually delivered securities, when in fact they were
maintaining naked short positions and profiting from them. But
Ross Albert, an attorney for Colak, said his client disagreed
with the way the SEC characterized his trading strategy.
"This was a market neutral trading program," Albert said.
"His program was based on the notion of arbitrage and would make
a profit whether the price of the underlying stock went up or
"In his mind, the rolling over of these short positions was
legal," he added, saying his client was pleased to have resolved
Kostov, 40, who represented himself in the case, could not
be reached for comment. He has not worked at Florida State
University since 2012, a school spokeswoman said.
She said Colak, 39, was still employed as an assistant
professor in the university's department of finance.
The SEC in recent years has ramped up its focus on bringing
naked short-selling cases.
In one prominent case, an SEC administrative law judge last
year ordered optionsXpress - now owned by Charles Schwab - its
former chief financial officer and a customer to pay $4.8
million in fines and return $4.2 million in connection with
alleged illegal short-selling.
The SEC also charged the Chicago Board Options Exchange
with failing to police for short-selling abuses in
connection with the optionsXpress matter, and the exchange
agreed to pay a $6 million penalty.