Datek Online Holdings
, the fourth-largest online brokerage, Tuesday settled with the
Securities and Exchange Commission
for allegedly failing to properly segregate customer money. Datek has agreed to pay a $50,000 civil fine.
The SEC also fined Datek's former chief financial officer, Moishe Zelcer, $10,000 and suspended him for 90 days, saying he had caused Datek's violations.
Stephen Franco, an online brokerage analyst at
US Bancorp Piper Jaffray
, says the allegations are to his knowledge the first of their kind for a major online brokerage. ''I would guess this isn't very common,'' Franco said. But, he adds, ''brokerages get fined for all kinds of things.''
News of the SEC action, Franco notes, follows lingering questions about Datek that started last summer with an article in the
New York Times
about an investigation by the Manhattan district attorney into Datek's trading unit, which it sold early last year. Rob Bethge, Datek's marketing director, says that investigation is just a rumor. Datek, he says, is cooperating with New York Attorney General Eliot Spitzer's inquiry into the online brokerage industry, which involves numerous firms.
According to the SEC, brokers must establish "a segregated bank account in which the broker-dealer makes deposits in the amount by which moneys owed by the broker-dealer to its customers exceed moneys owed to the broker-dealer by its customers." The logic behind establishing this account is to ensure brokers cannot use customer money for their operations.
The SEC alleged that Datek, based in Iselin, N.J., on 12 different occasions from March to May of 1998, failed to maintain the minimum required balance for the separate customer account. "Datak also withdrew cash from this account to meet its own financial obligations, which arose at least in part from customer trading activity, and failed to make and record the required reserve formula computation," the SEC wrote in a document released Tuesday.
Datek, which settled the SEC's charges without either denying or admitting the allegations, says the firm's CFO miscalculated the amounts needed in the customer reserve account and Datek's operating accounts. As Bethge explains it, Zelcer's miscalculations caused him to transfer more money out of the customer account than he was supposed to, but not enough to put it below SEC required levels. The SEC also pointed the finger at Zelcer, saying that he aided, abetted and caused the firm's infractions. Zelcer couldn't be reached to comment.
The SEC also alleged that for the period ended April 24, 1998, Datek filed a false report of its capital position and failed to notify either the SEC or the
National Association of Securities Dealers
that its indebtedness had reached a certain percentage of its net capital. Datek's Bethge says that at no point during this time period did Datek fall beneath the SEC's minimum net capital requirements.
And the SEC said Datek kept inaccurate books and records and failed to maintain certain required records in an electronic storage media that couldn't be altered.
Zelcer, who had worked at Datek's precursor Datek Securities since 1984, stepped down as financial officer in July 1998.
Datek emphasized that the situation is in the past and that the company has hired a host of new officers. Bethge says that "certainly none of the issues that were brought up here are happening today." And the company has agreed to hire an independent consultant to review internal policies.