Datek moving ahead with expansion despite setbacks
NEW YORK, July 23 (Reuters) - Datek Online Holdings Inc.,
the No. 4 U.S. Internet brokerage, said on Friday it is moving
ahead with expansion plans despite recent setbacks, including
an announced investment falling through and a criminal probe
into its predecessor company.
The company, which also owns the second-largest electronic
stock matching system, Island ECN, on Tuesday said Microsoft
Corp. <MSFT.O> co-founder and venture capitalist Paul Allen
backed out of a $50 million to $75 million investment, and two
other investors reduced their commitments by $30 million to $55
million. In all, Datek got $105 million less than the $300
million it announced in May.
Allen's decision came after Datek Online received two
document subpoenas from the U.S. Attorney's office late last
week in a probe of Datek's predecessor company, Datek
Securities Corp.
"Datek Online has not been informed that we are the target
of any investigation, and we're cooperating with the U.S.
Attorney's office in their investigation of our predecessor
firm, Datek Securities Corp," Datek Online's chief marketing
officer, Robert Bethge, said Friday.
Bethge declined to say what documents the firm had handed
over and a spokeswoman for the U.S. Attorney's office was not
immediately available for comment.
Datek still raised $195 million from two other venture
capital firms, France's Groupe Arnault and TA Associates. The
money should cover Datek Online's plans for advertising its Web
brokerage and Island's aim to become a full-fledged stock
exchange, Datek officials said.
"Certainly $300 million would have been nicer than $195
million, but we're not cash strapped and the business plan is
continuing exactly as planned," Bethge said.
Island will receive $30 million of the total, for which
Arnault and TA Associates get a combined 15 percent equity
stake, said Island President Matthew Andresen. Andresen added
another announced investment, $25 million by Internet brokerage
TD Waterhouse Group Inc. <TWE.N>, would close shortly.
"Certainly we are being courted by a lot of parties,
there's a big land grab going on there," Andresen said. "We
need $30 million for our exchange filing and marketing
campaign, but this is a very efficient business and we are in a
very good position no matter what."
If the Waterhouse investment closes, Datek Online will own
72.5 percent of Island, Waterhouse 12.5 percent, and Arnault
and TA each 7.5 percent. The investments value Island, which
matched buyers and sellers of about 95 million shares a day in
the second quarter, at $200 million.
Datek officials declined to say why Paul Allen' investment
fund, Vulcan Ventures, decided to pull out of the investment.
"We could not come to terms with them," Andresen said.
"There are a lot of issues in any kind of a deal like this."
The New York Times newspaper this week, citing people close
to the situation, said Vulcan backed out partly because of
worries about the regulatory and criminal probes. A Vulcan
spokeswoman said the firm decided against the investment after
evaluating it, and declined to give further details.
Datek Online, which was founded early last year, and its
Datek Securities predecessor firm indeed did have a spotty
regulatory record. One of Datek Securities's former head
traders has paid regulatory fines for illegal trading practices
but currently is not associated with the firm, Datek officials
said.
In addition, Datek Online recently paid a $50,000 fine to
the U.S. Securities and Exchange Commission to settle charges
that it used customer money to meet the firm's financial
obligations. Datek's former chief financial officer also paid a
$10,000 fine and no longer is with the firm.
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REUTERS
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