Paul Allen, Vulcan Ventures will NOT invest in Datek. Concerns about criminal investigations:
Article in NY Times:
nytimes.com
<<Vulcan Ventures Yanks Investment in
Datek Online
By DAVID BARBOZA
ulcan Ventures, the venture capital fund financed by Paul Allen,
co-founder of Microsoft, has pulled out of its part of a planned
$300 million investment in Datek Online Holdings Corp., partly because
of concerns about criminal and regulatory investigations into the online
brokerage firm, according to people familiar with the investment.
A spokeswoman for Vulcan, Susan Pierson Brown, confirmed that the
fund had withdrawn from the deal, announced two months ago, but she
declined to elaborate. Just before the deal closed, Vulcan changed its
mind, citing "due diligence" problems, according to people who worked
on the deal.
Datek officials said that the two other venture capital firms, Groupe
Arnault of Paris and TA Associates of Boston, that had been part of the
original announcement signed contracts on Tuesday to complete their
Datek investments, though they lowered the amount to $195 million from
the expected $225 million to $250 million.
Vulcan, which is based in Bellevue, Wash., was expected to invest $50
million to $75 million in Datek, people familiar with the deal said. Vulcan
also dropped plans for an additional $25 million investment, or 12
percent interest, in the Island ECN, a fast-growing electronic stock
exchange operated by Datek.
Vulcan's withdrawal is a serious setback to Datek Online, which in the
mid-1998 canceled an initial public offering of stock after the Manhattan
district attorney said he was investigating whether Datek had taken part
in a money-laundering operation and former traders at Datek said they
were interviewed by the Securities and Exchange Commission about
whether there were illegal trading practices at the firm.
Neither the SEC nor the Manhattan district attorney would comment
Wednesday on whether those investigations were continuing, but
law-enforcement officials said that Datek remained under investigation by
at least two regulatory and law enforcement bodies.
Separately, Datek was named, but not charged, in a federal indictment in
Florida last month that accused five non-Datek individuals, including two
with ties to organized crime, with mail fraud, securities fraud and money
laundering.
In April, Sheldon Maschler, a former owner and trader at Datek, was
sued by the SEC, which accused him of improperly handling one account
at the center of the Florida indictments. The beneficiary of that account
was named Martin Clainey, according to the SEC. Prosecutors in Florida
now say that Clainey was really Philip Gurian, who was banned for life
from the securities industry and worked closely with Philip Abramo, a
captain in the Decavalcante crime family. Datek officals said Wednesday
that they had not been informed about the Florida case.
In May, Datek was sanctioned by the SEC and fined $50,000 for filing
false financial reports and illegally dipping into customer money to pay its
bills in spring 1998. The company was censured and the former chief
financial officer was fined and suspended from Datek. The company says
he has since been dropped from the payroll.
Datek has said that since around mid-1998 it has reorganized its
operations and hired well-respected executives to lead its aggressive
push into the booming online trading arena. The company is now the
nation's fourth-largest online broker with more than $6 billion in customer
assets and 253,000 online trading accounts. Last May, its credibility was
enhanced when it won the backing of the three prominent venture capital
firms, and in particular Allen, one of the best-known names in the world
of high technology.
Datek was expecting to use the infusion of cash, about $300 million in all,
to upgrade its technology at its fast-growing online brokerage firm and
help prepare the Island ECN, which has petitioned the SEC to become a
full-fledged stock exchange. To do so, it will have to come up with a
regulatory scheme, among other costly endeavors.
The company remains upbeat about its prospects and said Wednesday
that it was exploring other financing options. Earlier this year,
Waterhouse Securities, another big online trading firm, made a $25
million investment in Datek. Robert Bethge, a spokesman for Datek, said
Wednesday that TA Associates and Groupe Arnault had agreed to invest
$195 million, trimmed back from a proposed investment of $225 million
to $250 million. As for Vulcan Ventures, Bethge said, "The investment
has closed, and Vulcan has opted, for whatever reason, not to
participate."
Asked whether Vulcan expressed concern about Datek's past, including
its long history of regulatory problems and investigations into the
company, Bethge said, "I can't give you the specifics but that's the sense
I've gotten. That's a fair statement."
Officials at TA Associates and Groupe Arnault each said Wednesday
that they remained confident in Datek and their investment. They had no
comment on the decision by Vulcan Ventures.
"We did our due diligence very seriously," said Jean-Bernard Tellio, head
of the Internet unit at Group Arnault, a private holding company run by
the French businessman Bernard Arnault. "The story of the company is
very complicated, and there were some clouds, but we spent three
months investigating this company and it looks terrific. We wouldn't risk
our reputation if we weren't confident."
TA Associates, a venture capital fund, said it was also confident about its
investment in Datek, which was arranged through Credit Suisse First
Boston. "We were given all the facts by Datek and we did our own
investigation," said Kenneth Schiciano, a principal at TA Associates.
Although Datek has won praise from Wall Street analysts as a powerful
online brokerage firm, even company officials concede that Datek's
history is troublesome. "There's no hiding from the fact that Datek
Securities had a questionable past," Bethge said Wednesday, speaking of
the company that is now Datek Online.
The company, which began in the 1970s as Datek Securities, gained
fame in the 1980s and early 1990s as a day trading firm that specialized
in NASDAQ stocks under its two chief traders, Maschler and Jeffrey
Citron, now the chief executive of Datek Online.
But with that success came repeated regulatory scrutiny and fines against
Datek traders, including Maschler and Citron for engaging in illegal
trading practices. Datek officials said Maschler was no longer an owner
of the company.>>
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