S.E.C. Punishes Online Broker in Fund Shift
By DAVID BARBOZA -- May 19, 1999
T he Securities and Exchange Commission said Tuesday
that it had imposed sanctions against Datek Online, one
of the nation's fastest-growing online brokers, for
filing a false financial report and dipping into
customer money last year, in part to pay off company
expenses.
The SEC, which in recent months has
stepped up its effort to patrol the
burgeoning online trading industry, said
Datek Online had failed to properly
separate its customers accounts from
the company's operations and that at
times Datek officials had shifted as
much as $50 million a day from various
customer accounts to settle other
customer trades and to pay company
bills.
While no customer money was lost, the
improper record-keeping -- which
included falsifying a financial document
that records the amount of capital on
hand -- did put customer money at
greater risk, the SEC said.
The SEC fined Datek $50,000. The
company was also censured and
ordered to hire an outside financial
consultant to review its internal
procedures. The SEC also fined former
Datek chief financial officer Moishe
Zelcer $10,000 and suspended him
from the brokerage industry for 90
days.
Datek officials said Tuesday that as a result of the
SEC inquiry last year, the company responded quickly
and reformed its back-office operations by hiring new
accountants and managers and removing Zelcer, a
longtime Datek official. Zelcer was not dismissed, a
spokesman said, though he is currently obeying a 90-day
SEC suspension.
Still, the sanctions against the company raise
troubling questions about the financial integrity of a
fast-growing online brokerage firm that has also
petitioned the SEC about transforming its booming
electronic-trading system, the Island ECN, into an
independent stock exchange that could someday rival the
New York Stock Exchange and the NASDAQ stock market.
Less than a year ago, Datek called off a
much-anticipated initial public offering amid
accusations that it had taken part in a
money-laundering operation that was being investigated
by the office of the Manhattan district attorney.
Around the same time, the SEC was investigating whether
Datek had encouraged illegal trading practices at its
former day-trading unit, and whether it was involved in
falsifying its financial and trading records, according
to former Datek traders who had been interviewed by the
SEC.
Datek began as a small Brooklyn brokerage firm that
specialized in day trading and developed a long history
of fines and suspensions related to, among other
things, manipulating the stocks of small companies. It
is now attempting to leap into the big leagues as an
online broker known for innovative technology and fast
trading executions -- thus its popularity with day
traders.
In the last year, Datek has brought in new managers,
hoping to polish its image as a major online brokerage
firm with ambitions to turn the Island ECN into a major
electronic stock exchange that could change the way the
market operates. Earlier this year, the company hired
Edward Nicoll, co-founder of Waterhouse Securities, as
its chief operating officer and John Mullin, another
Waterhouse executive, as president.
Waterhouse Securities, which is owned by Toronto
Dominion Bank, also formed an alliance with Datek by
investing $25 million for a 12.5 percent stake in the
Island ECN, a so-called electronic commerce network.
Robert Bethge, a spokesman for Datek, which is based in
Iselin, N.J., said that the moves by management were
part of an effort to strengthen the fast-growing
company with seasoned veterans and new management
practices.
In the spring of 1998, however, the SEC said there had
been 12 occasions when Datek used customer funds to
"meet its own obligations." And on 12 occasions Datek
failed to maintain the minimum required balance in its
customer account -- a detail that puts customer money
at greater risk in the event of a sharp market swing.
"Customer money is supposed to be put aside, and they
used some of that money," said Henry Klehm, an
associate director at the SEC in New York. "These
back-office and customer protection rules are very
important to the financial integrity of the firm."
The agency also said Datek kept inaccurate books and
records, such as general ledgers, and that it did not
maintain a required electronic record that could not be
altered.
Bethge, though, said the financial errors had been made
in "good faith" and were unintentional. "They were just
flawed calculations," he said. "And they caused a
ripple effect to other numbers." He added: "We take
this seriously; this is not something we're trying to
minimize. We've gone through a lot to make sure it
doesn't happen again."
Though back-office operations are technical, regulators
say they are essential to insuring that fast-growing
companies like Datek -- which saw its business surge by
49 percent in the first quarter of this year -- have
enough money in downturns or during slower business
cycles.
Bill Burnham, an online analyst at Credit Suisse First
Boston, said that some of the problems go beyond Datek,
though he says the brokerage firm had less access to
capital than other online brokers, several of whom have
the financial backing of major Wall Street firms or
deep-pocketed private investors.
Burnham said, though, that he was confident about
Datek, partly because of the management changes. "I
guess they grew so fast, they forgot about maintaining
their capital," he said. "All these firms have had
trouble keeping pace with growth."
Copyright 1999 The New York Times Company |
