The judge, an independent judicial officer, ordered Jonathan Feldman to forfeit $2.7 million profits and pay a $2 million civil fine, The Wall Street Journal reported Tuesday.
The judge imposed similar penalties on a brokerage firm owned by Charles Schwab Corp.
The firm, optionsXpress Inc., was ordered to forfeit $1.6 million and pay a $2 million civil fine.
Naked shout selling is illegal, because it is considered a type of fraud that can distort markets.
Short selling involves borrowing an asset and selling it, then hoping the price goes down, as it includes a contract to buy the asset back at a later date.
Instead of buy low and sell high, it's sell high and buy low, using a borrowed asset.
But naked short selling is the term used for setting up short selling deals, but never actually borrowing the asset.
The banker and optionsXpress were accused of conducting in naked short selling from late 2008 through early 2010.
The judge also ordered optionsXpress regulatory liaison and Chief Financial Office to pay a fine of $75,000 and to discontinue working in the securities industry.
Appeals could be filed. "There was no naked short selling in this case," said optionsXpress attorney Stephen Senderowitz.
"We think the judge got it wrong," he said.
Chief Administrative Judge Brenda Murray said Feldman, "executed a trading strategy that he knew or was reckless in not knowing, perpetrated a fraud on the participants in the securities markets."
"This is the kind of case the market-abuse unit was set up to do," said Daniel Hawke, head of the SEC enforcement division.
Ray Liotta sues skin care company over use of likeness
Millions of Getty images now available for free via embed tool