January 31, 2014 / 11:30 PM / 5 years ago

Florida state professors settle naked short-selling case

WASHINGTON, Jan 31 (Reuters) - 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 short position.”

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 down.”

“In his mind, the rolling over of these short positions was legal,” he added, saying his client was pleased to have resolved the case.

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.

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