Datek’s CEO Steps Down as Firm Seeks to Attract Capital, Lift Controversy
Datek Online Holdings Corp., parent of a fast-growing stock-trading network that is one of the main competitive threats to established markets, said Wednesday that its controversial chief executive resigned--a move likely to boost the firm’s chances of raising money by going public.
The departure of Jeffrey Citron, a 29-year-old onetime day-trading whiz kid, could speed Datek’s expansion of its Island trading network, one of the upstart systems that have triggered upheaval at the New York Stock Exchange and Nasdaq.
Island is seeking permission from the Securities and Exchange Commission to become a full-fledged stock exchange and compete directly with the NYSE for investors’ trades, as it already competes with Nasdaq.
Citron stepped down from New Jersey-based Datek and its board to quiet concerns about the company, which is being investigated over trading practices and other possible infractions by at least two government bodies.
Citron was succeeded by Edward Nicoll, who had been Datek’s president and chief operating officer.
“It’s no secret that Datek has come from a controversial past,” Nicoll said. “What Jeff wanted to do was to send a clear message that this is a new beginning for the company.” Citron could not be reached for comment.
Analysts said Citron’s departure could pave the way for an initial public stock offering by Datek, although Nicoll said no offering is imminent. Plans for an IPO were canceled last year amid concerns about Datek’s past.
Citron’s a “very smart guy and I think he’s smart enough to figure that if he stepped down, the company’s probably going to be worth more and have an easier time than if he was still running it,” said Bill Burnham, a former stock analyst who’s now a general partner at Softbank Capital Partners.
Analysts described Nicoll, who co-founded what is now TD Waterhouse Securities, as a respected industry veteran who brings instant credibility.
“He is someone who has impeccable credentials,” said Scott Appleby, an analyst at BancBoston Robertson Stephens.
Originally known as Datek Securities, the company began in 1970 as a small brokerage in Brooklyn, N.Y. By the late 1980s it had evolved into one of the first firms catering to the predecessors of modern “day traders”--investors who trade hyper-actively using special computers.
Citron, who joined Datek out of high school at age 17, is by all accounts a technology and programming genius who designed the complex trading software that formed the basis for Island.
However, Datek and Citron also became embroiled in controversy as regulators became concerned about some of its practices.
Datek has acknowledged that the U.S. attorney for the southern district of New York is looking into past trading activities. The SEC also is examining “several matters,” Nicoll said.
In May, the SEC fined Datek $50,000 for allegedly dipping into customer funds to pay its own financial obligations and for filing a false financial report.
Still, Datek raised almost $200 million in a private placement this year--a sign of big investors’ interest in new stock-trading systems.
But Microsoft co-founder Paul Allen pulled out of the financing at the last minute because of worries over the investigations.
Datek, which also owns the fourth-largest online brokerage, has taken other steps to distance itself from its past. It changed its name to Datek Online Holdings last year and has stressed that the probes center on the day-trading unit, which was sold last year.
Analysts say that both Island and its sizable online brokerage operation, Datek Online Brokerage Services, have bright prospects.
Island is the second-largest of the new electronic communications networks. It controls about 15% of trading in Nasdaq stocks.
Island and the other ECNs, such as Instinet and Archipelago, match buyers and sellers electronically at potentially better prices than are available on Nasdaq or the NYSE. They pose such a threat that both Nasdaq and the NYSE are contemplating plans to become for-profit companies to compete.
However, while other ECNs have raised capital by signing on big-name Wall Street partners, Island has been quiet. In fact, Nicoll disclosed Wednesday that Datek is unlikely to finalize a deal with TD Waterhouse that called for the competing online brokerage to shell out $25 million for a 12.5% stake in Island. He cited differences over valuation and technology.
Citron’s departure may open the door for potential Island investors and Wall Street firms that would manage a Datek IPO. However, one source said investors would want to be certain that Citron’s departure is permanent and that Wednesday’s announcement was “not just a press-release break.”
Citron, who owns roughly 30% of Datek, agreed to let the board vote his shares on most matters for a two-year period. Citron could rejoin the board after that time, but it is doubtful he would return to a management role, Nicoll said.
