Broker brothers charged over alleged sale of ‘funny paper’
Wolfsons made millions off naked short selling of Chipotle Mexican Grill, SEC claims
Two brothers made more than $17 million through illegal short-selling practices involving shares of Chipotle Mexican Grill Inc., NYSE Group Inc. and other stocks, regulators said.
The Securities and Exchange Commission said Jeffrey Wolfson of Northbrook, Ill., and Robert Wolfson of West Orange, N.J., failed to find and deliver shares involved in short sales from July 2006 through July 2007.
The practice of shorting a stock, or selling borrowed shares in an effort to profit from declining prices, is legal. However, the shares must be located before selling them short or the transactions become illegal naked short sales, the SEC said. Rules against such trades are meant to ensure that the seller delivers securities to the buyer when they are due.
“The Wolfsons had a major advantage over competitors who complied with the law and incurred the costs associated with actually borrowing the securities,” said George Canellos, director of the SEC’s New York regional office. “The SEC is committed to recovering substantial ill-gotten proceeds made by traders who seek to circumvent important short-selling regulations.”
Jeffrey Wolfson’s attorney, Ira Sorkin of Lowenstein Sandler PC, said his client “intends to defend against the charges” and had known about the investigation for a long time. Mr. Sorkin said he hadn’t yet read the SEC staff’s administrative proceeding, he said.
Jeffrey Wolfson broke the securities rules while working as a broker-dealer himself and again as the principal trader at a now-closed Chicago B-D, the SEC alleged in its order. He also taught his younger brother how to profit illegally, the commission said.
Robert Wolfson allegedly traded illegal naked short sales through New York broker-dealer Golden Anchor Trading II LLC, which also is charged by the SEC. Golden Anchor is now Barabino Trading LLC. His lawyer, Thomas McCabe at McCabe & Flynn LLP, had no comment on the case.
In a recorded telephone conversation, the elder Wolfson brother allegedly said: “What I sell them is not guaranteed. It never gets delivered; it’s funny paper.”
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