SEC Charges College Professor, Gonul Colak, in Naked Short Selling Scheme

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On January 31, 2014, the Securities and Exchange Commission charged two Florida college professors 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.

For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit  This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
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