College Professors Fines for Abusive Naked Short Selling

Two Florida college professors settled allegations that they operated an abusive naked short selling scheme, according to the U.S. Securities and Exchange Commission.

Gonul Colak and Milen Kostov “engaged in a series of sham transactions designed to perpetuate a naked short position as part of an elaborate options trading strategy,” the SEC said in a statement yesterday.

“Colak and Kostov engaged in trickery and deceit to avoid their delivery obligations and conceal their short-selling scheme,” said Daniel M. Hawke, chief of the SEC Enforcement Division’s Market Abuse Unit.

In a short sale, an investor borrows shares and sells them with the goal of profiting from a price decline by repurchasing at a lower price and repaying the loan. The SEC’s Regulation SHO prohibits naked short sales by requiring brokers to close out clients’ short sales within three days and bars them from executing further bets against individual companies until previous sales have been settled.

The trading scheme started in 2010 and involved more than $800 million of call options in at least 20 companies, according to the SEC, which alleged the men moved shares between multiple brokerage accounts to avoid detection. The agency also said the men made more than $400,000 in profits on the scheme.

Colak and Kostov paid more than $670,000 in fines and penalties to settle the matter and did not admit nor deny any wrong doing, the SEC said.

Colak’s attorney, Ross Albert of Morris, Manning & Martin LLP in Atlanta, said his client wasn’t aware that the trades were prohibited.

‘Didn’t Know’

“Colak didn’t know it would violate the law, but the SEC has determined that the conduct was reckless in not knowing this,” Albert said. “He never had any previous contact with law enforcement.

The men were identified by the SEC as college professors from Tallahassee, Florida. Albert said his client is employed by Florida State University. Colak is listed on the school’s website as an assistant professor in the College of Business.

The SEC said Kostov represented himself in the matter. Calls to a number listed on a faculty web page at the Florida A&M University-Florida State University College of Engineering were not returned.

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