Six traders, brokerage penalized $70 million

SEC penalties for fraud are among its largest ever against individuals

January 15, 2003|By BLOOMBERG NEWS

WASHINGTON - Day-trading firm Heartland Securities Corp. and six brokers agreed to pay $70.2 million to settle charges that they made tens of millions of dollars in illegal profits exploiting a Nasdaq stock market trading system intended for individual investors.

Sheldon Maschler, Erik Maschler, Jeffrey Citron and Michael McCarty made thousands of illegal proprietary trades on Nasdaq's small-order execution system (SOES) from 1993 to 2001, the Securities and Exchange Commission said. The defendants hid their trades by creating fictitious books and filing false regulatory reports.

Sheldon Maschler, 58, agreed to pay $29.2 million in penalties and Citron, 32, agreed to pay $22.5 million, among the largest regulatory penalties ever assessed against individuals, the SEC said. Heartland agreed to pay a $7 million fine.

Nasdaq created the automated SOES system in the 1980s to give individual investors the same access to the market as large brokerages.

Nasdaq changed the system after abuses by professional day traders, who bought and sold securities on moment-to-moment stock movements during the 1990s market boom.

"Brokers' abuse of a trading system in a manner in which it wasn't designed was very extensive, very flagrant," said Antonia Chion, associate SEC enforcement director. The SEC did not allege any investor harm, she said.

All the brokers charged worked for Datek Securities Corp. in Iselin, N.J. Datek's day-trading business was bought by Heartland in 1998.

Three of the six brokers - Sheldon Maschler, his son Erik, 32, and McCarty - also went on to work for Heartland, where they continued their fraudulent trading activity, the SEC said.

Datek Securities' successor firm, Datek Online Holdings Corp., agreed a year ago to pay a $6.3 million fine on similar SEC charges. Datek Online merged in September with Ameritrade Holding Corp., an online brokerage.

The Heartland fraud was orchestrated by both Maschlers, Citron, and McCarty, 39, the SEC said. Other brokers who agreed yesterday to pay fines were Aaron Elbogen, formerly Datek Securities' chief executive officer, and Moishe Zelcer, formerly Datek's chief compliance officer, the SEC said. None of the defendants admitted or denied wrongdoing.

So-called "SOES bandits" mushroomed as the Nasdaq composite index increased six-fold from 1995 to 2000. These traders profited when dealers, known as market makers, were slow to change the prices they quoted to buy and sell stock.

"They would identify a stock that would almost certainly go up or down," said David Whitcomb, chairman of Automated Trading Desk LLC, an electronic trading firm in Charleston, S.C. "They'd send an order that the market maker couldn't refuse to fill. Market makers hated them."

Citron began his career at Datek in 1988 as a 17-year-old clerk and eventually gained control of the firm, turning it into the fifth-largest online brokerage in 2000.

The SEC also filed a related case yesterday against Joshua M. Levine, 34, chief financial officer of Christian Klein & Cogburn Inc., a brokerage and the developer of software used by Datek to conceal the trades from regulators.

All the brokers charged were barred from the securities industry, though Elbogen and Zelcer can reapply after two years.

The U.S. attorney's office in Manhattan said last year that it was conducting a criminal probe of Maschler's and Citron's trading activities.

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