Securities Law Blog

Two brothers have been charged by the SEC with naked short selling for failing to locate and deliver shares involved in short sales to broker-dealers. The SEC alleges that Jeffrey Wolfson engaged in naked short sales while working as a broker-dealer himself and later as the principal trader at a Chicago-based broker-dealer that is no longer in business. Robert Wolfson allegedly used the technique he learned from his brother to conduct illegal naked short sales while trading through an account at New York-based broker-dealer Golden Anchor Trading II, LLC, now known as Barabino Trading, LLC.

The brothers reportedly used two types of transactions in order to promote their scheme. According to the SEC’s order, from July 2006 to July 2007, the Wolfsons used a reverse conversion to sell stock short and simultaneously sell a put option and buy a call option on the stock. The second type of transaction allegedly used by the brothers was a stock and option combination that created the illusion that the party subject to a close-out obligation had satisfied that obligation by buying the same kind and quantity of securities it had sold short. In regard to this transaction, the SEC claims that the stock was always sold either the next day or within several days, and that the Wolfsons had reason to know that the purchased shares in these sham transactions would never be delivered because they were purchased from another naked short seller who did not own the stock either.

In a recorded telephone conversation Jeffrey Wolfson stated, “What I sell them is not guaranteed, it never gets delivered, it’s funny paper,” according to the SEC’s order.

The SEC’s order instituting administrative proceedings against Jeffrey and Robert Wolfson claims that the brothers generated more than $17 million in ill-gotten gains from naked short selling transactions involving such stocks as Chipotle Mexican Grill Inc., Fairfax Financial Holding, Ltd., Novastar Financial Inc., and NYSE Group.