The SEC just charged a finance professor from Florida State and an engineering professor from Florida A&M with naked short selling, which the professors might have been doing as a kind of protest against a practice that doesn't have a very good case for illegality behind it.
But I've heard it said that it's not the crime, it's the cover-up, and the two professors spent a lot of time covering up what they were doing. Moreover, part of their point of their shorts was to not take on the expense of covering, too, which for good or ill, is something all shorts are required to do. Anyway, here's the SEC:
Colak and Kostov set their scheme in motion in early 2010 and went on to sell more than $800 million worth of call options in more than 20 companies. Their trading strategy involved purchasing and writing two pairs of options for the same underlying stock, and targeting options in hard-to-borrow securities in which the price of the put options was higher than the price of the call options. Colak and Kostov profited by avoiding the cost of instituting and maintaining the short positions caused by their paired options trading.
Sound bad? Well, the SEC didn't get an admission of guilt out of the two, and all told, they had to pay the agency $400,000 to settle the case. So not exactly throwing away the key. Not good for business school professors to be accused of violating the securities law, though. HT: Securities Docket.
UPDATE: Here's Matt Levine with a nice explanation, more careful than anything you see above, or how the scheme was meant to work, and the regulatory arbitrage implications thereof, vel non.
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