Professors Gone Wild: $420k illicit gains on a $30k investment

Professors Gone Wild: $420k illicit gains on a $30k investment

February 19, 2014 Research Insights
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(Last Updated On: February 19, 2014)

A couple of University of Florida professors got busted by the SEC in a fairly fascinating trading scheme.

In total, the profs earned $420,000 in profits off an initial capital investment of $30,000–not a bad IRR!

  1. These proceedings concern Colak’s and Kostov’s perpetration of an abusive “naked” short selling scheme. From at least July 2010 through February 2012, Respondents engaged in a complex options trading strategy, which they hedged by establishing short positions. Respondents’ accounts were at brokerage firms that prohibited short selling in certain hard to borrow securities, and thus, the brokerage firms required Respondents to close any short position resulting from options activity and to deliver securities within the standard three-day settlement period. Rather than deliver the securities, Respondents executed sham transactions to create the illusion that they had delivered when in fact they maintained these uncovered “naked” short positions. Through this scheme, Colak and Kostov engaged in manipulative and deceptive conduct in violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rules 10b-5 and 10b-21 thereunder.
  2. The uncovered “naked” short positions that Respondents established were a key component of their complex trading strategy. From at least July 2010 through February 2012, Respondents established uncovered “naked” short positions in the securities of over 20 companies without taking any steps to deliver the securities and thus avoiding the costs associated with these obligations.
  3. Respondents sold approximately $800 million worth of call options and purchased at least $1.2 billion worth of common stock in over 20 issuers. Over the course of their scheme, Respondents reaped trading profits of approximately $420,000 on an initial investment of $100,000. Respondents agreed that Colak would receive 68% of the profits for providing the initial funds and Kostov would receive 32% of the profits for executing the trading strategy.

http://www.sec.gov/litigation/admin/2014/33-9522.pdf

h.t. T. Cipperman


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Wesley R. Gray, Ph.D.

After serving as a Captain in the United States Marine Corps, Dr. Gray earned a PhD, and worked as a finance professor at Drexel University. Dr. Gray’s interest in bridging the research gap between academia and industry led him to found Alpha Architect, an asset management that delivers affordable active exposures for tax-sensitive investors. Dr. Gray has published four books and a number of academic articles. Wes is a regular contributor to multiple industry outlets, to include the following: Wall Street Journal, Forbes, ETF.com, and the CFA Institute. Dr. Gray earned an MBA and a PhD in finance from the University of Chicago and graduated magna cum laude with a BS from The Wharton School of the University of Pennsylvania.