SEC Charges Two College Professors in Naked Short Selling Scheme
College professors Gonul Colak and Milen Kostov were charged by the SEC with orchestrating a $400,000+ illicit profit scheme through abusive naked short selling via sham reset transactions and multiple brokerage accounts, violating securities laws and settling for over $670,000 in penalties and disgorgement.
Gonul Colak and Milen Kostov, college professors in Tallahassee, Fla., engaged in a complex naked short selling scheme from early 2010, generating over $400,000 in illicit profits by deliberately failing to deliver securities within the three-day settlement period. They used sham reset transactions and moved positions across multiple brokerage accounts to conceal failures to deliver, while trading over $800 million in call options across more than 20 companies using paired options strategies in hard-to-borrow securities. The SEC charged them with violations of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rules 10b-5 and 10b-21; without admitting or denying guilt, Colak paid $457,557 and Kostov paid $214,740 in disgorgement, interest, and penalties, totaling over $670,000, and both agreed to cease and desist.
College professors Gonul Colak and Milen Kostov orchestrated a sophisticated naked short selling scheme from early 2010, generating over $400,000 in illicit profits by selling securities they did not own and intentionally failing to deliver them within the standard three-day settlement period. To evade detection, they executed sham reset transactions that falsely appeared to fulfill delivery obligations, while cycling short positions across multiple brokerage accounts to fragment and obscure their failures to deliver. Their strategy involved purchasing and writing paired options on over 20 companies, targeting hard-to-borrow securities where put prices exceeded call prices, allowing them to profit from avoided short-selling costs without actual short positions. The SEC uncovered the scheme through blue sheet data analysis, cross-referencing trading patterns, and tracing thousands of transactions, revealing coordinated activity between the two. They were charged with violating Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rules 10b-5 and 10b-21. Without admitting or denying the allegations, Colak agreed to pay $285,600 in disgorgement, $21,957 in prejudgment interest, and a $150,000 penalty, while Kostov paid $134,400 in disgorgement, $10,340 in interest, and a $70,000 penalty—totaling $670,000. Both agreed to cease and desist from future violations, as the SEC, aided by FINRA and its Market Abuse Unit, emphasized its commitment to exposing even the most complex market abuse schemes.
Exhibits & Attached Documents (1)
Extracted insights
- $800.00M $800 million $100M–$1B
- $670K $670,000 $100K–$1M
- $400K $400,000 $100K–$1M
- $286K $285,600 $100K–$1M
- $150K $150,000 $100K–$1M
- $134K $134,400 $100K–$1M
- $70K $70,000 $10K–$100K
- $22K $21,957 $10K–$100K
- $10K $10,340 $10K–$100K
- person Daniel M. Hawke
- agency Financial Industry Regulatory Authority
- person gonul colak
- person milen kostov
- person naked short selling scheme
- agency sec’s charges
- agency sec’s investigation
- agency Securities and Exchange Commission
- Securities and Exchange Commission charged Gonul Colak and Milen Kostov
- Gonul Colak and Milen Kostov perpetrated naked short selling scheme
- Gonul Colak and Milen Kostov agreed to settle SEC’s charges
- Gonul Colak and Milen Kostov paid $670,000
- Gonul Colak agreed to pay $285,600 in disgorgement
- Gonul Colak agreed to pay $21,957 in prejudgment interest
- Gonul Colak agreed to pay $150,000 penalty
- Milen Kostov agreed to pay $134,400 in disgorgement
- Milen Kostov agreed to pay $10,340 in prejudgment interest
- Milen Kostov agreed to pay $70,000 penalty
- Gonul Colak and Milen Kostov violated Section 17(a) of the Securities Act of 1933
- Gonul Colak and Milen Kostov violated Section 10(b) of the Securities Exchange Act of 1934
- Gonul Colak and Milen Kostov violated Rules 10b-5 and 10b-21
- Gonul Colak and Milen Kostov sold $800 million worth of call options
- Daniel M. Hawke said Colak and Kostov engaged in trickery and deceit
- Jason Breeding and Diana Tani conducted SEC’s investigation
- Daniel M. Hawke and Joseph G. Sansone supervised investigation
- Financial Industry Regulatory Authority provided assistance SEC
The Securities and Exchange Commission today charged a pair of college professors in Tallahassee, Fla., with perpetrating a complex naked short selling scheme for more than $400,000 in illicit profits. Abusive naked short selling occurs when shares are sold without having the shares to deliver, and then intentionally failing to deliver the securities within the standard three-day settlement period. An SEC investigation found that Gonul Colak and Milen Kostov repeatedly engaged in a series of sham transactions designed to perpetuate a naked short position as part of an elaborate options trading strategy. Colak and Kostov were required to deliver the securities underlying their short positions within the standard three days. Instead, their sham reset transactions created the illusion that they had delivered the underlying securities when in fact they had taken no steps to do so. They maintained the uncovered naked short positions and profited. Colak and Kostov agreed to settle the SEC’s charges by paying more than $670,000. Colak and Kostov used multiple brokerage accounts to disguise the spurious nature of the sham transactions, moving a short position from one brokerage firm to another every few days in order to spread the failures to deliver across multiple firms in an effort to avoid detection. SEC investigators uncovered the complicated scheme while looking into unusual trading in one of the companies whose options were being traded by Colak and Kostov. An SEC examiner separately noted Kostov’s large volume options trading in a different company. By cross referencing their findings and crunching blue sheet data, it became clear that Colak and Kostov were likely trading with one another. SEC investigators pieced together the complex trading strategy – which involved literally thousands of trades – by tracing one of the trading sequences from start to finish. “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. “No matter how complex the trading scheme, we are committed to exposing and halting abusive naked short selling and holding wrongdoers like Colak and Kostov accountable for their misconduct.” According to the SEC’s order instituting settled administrative proceedings, 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. The SEC’s order finds that Colak and Kostov violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rules 10b-5 and 10b-21 thereunder. Colak agreed to pay $285,600 in disgorgement, $21,957 in prejudgment interest, and a $150,000 penalty. Kostov agreed to pay $134,400 in disgorgement, $10,340 in prejudgment interest, and a penalty of $70,000. Without admitting or denying the findings, Colak and Kostov agreed to cease and desist from committing or causing such violations. The SEC’s investigation was conducted by Jason Breeding and Diana Tani of the Market Abuse Unit in the Los Angeles Regional Office with assistance from the unit’s securities operations specialist Patrick McCluskey. The investigation was supervised by Daniel M. Hawke and Joseph G. Sansone. The SEC appreciates the assistance of the Financial Industry Regulatory Authority (FINRA).
The Securities and Exchange Commission today charged a pair of college professors in Tallahassee, Fla., with perpetrating a complex naked short selling scheme for more than $400,000 in illicit profits. Abusive naked short selling occurs when shares are sold without having the shares to deliver, and then intentionally failing to deliver the securities within the standard three-day settlement period. An SEC investigation found that Gonul Colak and Milen Kostov repeatedly engaged in a series of sham transactions designed to perpetuate a naked short position as part of an elaborate options trading strategy. Colak and Kostov were required to deliver the securities underlying their short positions within the standard three days. Instead, their sham reset transactions created the illusion that they had delivered the underlying securities when in fact they had taken no steps to do so. They maintained the uncovered naked short positions and profited. Colak and Kostov agreed to settle the SEC’s charges by paying more than $670,000. Colak and Kostov used multiple brokerage accounts to disguise the spurious nature of the sham transactions, moving a short position from one brokerage firm to another every few days in order to spread the failures to deliver across multiple firms in an effort to avoid detection. SEC investigators uncovered the complicated scheme while looking into unusual trading in one of the companies whose options were being traded by Colak and Kostov. An SEC examiner separately noted Kostov’s large volume options trading in a different company. By cross referencing their findings and crunching blue sheet data, it became clear that Colak and Kostov were likely trading with one another. SEC investigators pieced together the complex trading strategy – which involved literally thousands of trades – by tracing one of the trading sequences from start to finish. “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. “No matter how complex the trading scheme, we are committed to exposing and halting abusive naked short selling and holding wrongdoers like Colak and Kostov accountable for their misconduct.” According to the SEC’s order instituting settled administrative proceedings, 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. The SEC’s order finds that Colak and Kostov violated Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rules 10b-5 and 10b-21 thereunder. Colak agreed to pay $285,600 in disgorgement, $21,957 in prejudgment interest, and a $150,000 penalty. Kostov agreed to pay $134,400 in disgorgement, $10,340 in prejudgment interest, and a penalty of $70,000. Without admitting or denying the findings, Colak and Kostov agreed to cease and desist from committing or causing such violations. The SEC’s investigation was conducted by Jason Breeding and Diana Tani of the Market Abuse Unit in the Los Angeles Regional Office with assistance from the unit’s securities operations specialist Patrick McCluskey. The investigation was supervised by Daniel M. Hawke and Joseph G. Sansone. The SEC appreciates the assistance of the Financial Industry Regulatory Authority (FINRA).