CHICAGO (CN) - OptionsXpress, an online brokerage, sold $5.5 million of "phantom" Life Partners Holdings shares passed off as genuine company stock, the company and its shareholders claim in court.
Life Partners Holdings Inc., a financial services company, and six of its shareholders sued optionsXpress, CFO Thomas Stern, and one of its top customers, Jonathan Feldman, in Cook County Court.
Last year the Securities and Exchange Commission found that optionsXpress "through its senior officers, including its chief financial officer and its chief compliance officer, and six of its biggest customers committed securities fraud by engaging in the sales of hundreds of millions of dollars in counterfeit-phantom stock passed off as the genuine stock of 25 public companies, including almost $5.5 million of counterfeit-phantom stock of a small Texas public company, Life Partner Holdings, Inc," the complaint states.
Phantom stock looks like genuine stock on paper - or on screen - but was never issued by the corporation.
Plaintiffs claim optionsXpress "seduced the CBOE [Chicago Board Options Exchange] into participating in the trading of counterfeit-phantom stock over its exchange, and then into obstructing the SEC's investigation."
The SEC sanctioned the CBOE for its role in facilitating optionsXpress's securities fraud, according to the complaint. The CBOE is not a party to the new lawsuit.
"The SEC administrative filing against optionsXpress is precedent-setting in that it is the first case the SEC has filed against anyone for securities fraud in relation to the sale of counterfeit-phantom stock, even though this practice threatens the financial integrity of the capital markets," Life Partners says in the complaint.
The sales of phantom stock were related to optionsXpress's practice of abusive naked short selling, for which the SEC charged
the brokerage in 2012.
optionsXpress, now owned by Charles Schwab, still denies its fraudulent behavior, despite the SEC ruling
, according to the complaint.
"Plaintiff Life Partners and Life Partners shareholders seek a simple remedy from this court: temporary and permanent injunctions prohibiting the same defendants from selling any more counterfeit-phantom stock passed off as genuine stock of Life Partners."
Life Partners Holdings CEO Brian Pardo said in a statement: "This case isn't about money. It's about confidence in the market. It's about making sure that, in the future, shareholders can be sure that they are purchasing legitimate, authorized stock. Individual investors need to know that the stock they are buying is real and not phantom stock cooked up by Wall Street insiders. Without a stock certificate, we've seen how easy it is for Wall Street to pass off counterfeit stock in your account as legitimate and we want to put a stop to it."
Life Partners is represented by Gary Aguirre in San Diego, with assistance from Hal Wood with Horwood, Marcus & Berk in Chicago.