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Chicago Board Options Exchange fined $6 million in short sale scheme

The Chicago Board Options Exchange | Sun-Times file photo

The Chicago Board Options Exchange | Sun-Times file photo

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Updated: July 13, 2013 6:35AM

The Chicago Board Options Exchange has agreed to pay $6 million to settle charges that it poorly supervised its markets, the first fine against a financial market for an alleged regulatory breakdown.

The Securities and Exchange Commission said Tuesday that CBOE’s failures started with ignorance of rules it needed to enforce, but included actively helping a trading firm under scrutiny.

The SEC’s announcement said the “CBOE put the interests of the firm ahead of its regulatory obligations.”

The case involved an investigation into so-called “naked short selling” by optionsXpress, which was a Chicago-based brokerage before it was sold to Charles Schwab Corp. in 2011. The term refers to selling shares of stock without borrowing them first.

Short selling is a legal technique used by investors who believe a stock’s price will fall. The sold shares can be borrowed but must be delivered to the buyer within three days of a trade.

The SEC said optionsXpress engaged in sham trades to hide abusive short selling from 2008 to 2010 in such stocks as American International Group and Sears Holdings Corp. An SEC administrative judge last week ordered the firm, its former chief financial officer and a customer to pay a total $4.1 million in fines and disgorge $4.2 million in profits.

The trading occurred at the CBOE, the nation’s largest options market. The CBOE “took misguided and unprecedented steps to assist” optionsXpress and even edited the firm’s written responses to regulators, giving answers that were “inaccurate and misleading,” the SEC said.

In a written response, the CBOE said it launched an internal investigation and that all changes the SEC has required or recommended are being implemented.

“This settlement marks a significant step in putting the SEC matter behind us, but our commitment to maintaining the very highest standards in regulation and compliance will be carried forward throughout our organization,” the statement said.

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