Online brokers to pay up in fraud case

Seven former Datek Online employees agree to pay $70 million in fines in one of the largest online trading fraud settlements ever.

2 min read
Seven former Datek Online employees have agreed to pay $70 million in fines in one of the largest online trading fraud settlements ever.

The Securities and Exchange Commission charged that Datek Online brokers and executives allegedly participated "in an extensive fraudulent scheme" that involved padding their own accounts by using a day-trading system designed for individual investors.

Under the terms of the settlement unveiled Tuesday, the highest fines were levied on former Chief Executive Sheldon Maschler, who agreed to pay $29.1 million, and former chief trader Jeffrey Citron, who agreed to pay $22.5 million. Other defendants are required to pay fees ranging from $69,664 to $7 million. The defendants did not admit or deny the allegations.

"Today's action and hard-hitting penalties reinforce the high degree of integrity required of broker-dealers and persona associated with them," Antonia Chion, associate director of enforcement at the SEC, said in a statement.

The SEC said that beginning in 1994, the Datek employees manipulated a sophisticated automated trading system designed for small investors by creating and operating accounts in other people's names and then using those accounts to execute trades--an action illegal under federal law. At the time, trading regulations prohibited brokers from using the system to trade for their own accounts.

Datek was one of many online trading companies that gained momentum during the dot-com heyday as amateur investors began trying their hand at day-trading and other investment ventures.

The company sold its day-trading venture to Heartland in 1998, but federal investigators said the illegal trading scheme continued even after that. Heartland agreed to pay $7 million as part of the current settlement. Datek Online agreed to pay $6.3 million in fines in January 2002 to settle similar charges. Ameritrade bought the remainder of Datek's operations last fall, amid continuing consolidation in the online trading sector.