Day Traders May Be Out of the Spotlight, but NASD Cracks Down on Two Firms
The day-trading brokerage industry may have fallen out of the headlines, but regulators still are bearing down on the business.
On Monday, the National Assn. of Securities Dealers’ regulation arm brought disciplinary complaints against a pair of day-trading firms, including allegations of misleading advertising and improperly supervised margin loans at high-profile All-Tech Direct Inc. of Montvale, N.J.
The NASD charged All-Tech, one of the industry’s largest firms, with a series of “exaggerated and misleading” ads and statements about customer profitability, commissions and trade executions. The firm also failed to supervise employees who handled account-related loans between customers, a practice known as journaling.
“The case involves allegedly significant violations of our rules in a number of areas,” said Barry Goldsmith, executive vice president of enforcement at NASD Regulation.
The Securities and Exchange Commission brought a margin-lending complaint against All-Tech in February, charging that the firm made improper margin loans to customers so that they could continue trading--and thus, generating profit for the firm. All-Tech is contesting those charges.
All-Tech is headed by Harvey Houtkin, a controversial figure who has been outspoken in his criticism of regulators.
All-Tech general counsel Linda Lerner, said the NASD charges are overblown and vowed that the firm will fight them.
“What does it look like we have done that it becomes a major press event?” she said.
In the other case, the NASD accused Stock USA Inc. of San Diego with inadequate supervision of a Roslyn, N.Y., branch office. Stock USA allowed a person to recruit customers and suggest stock picks even though he wasn’t properly registered and had been barred from associating with brokerages, the complaint charges.
Jeffrey Kob, an attorney representing Stock USA, said the charges are technical in nature, and don’t involve the more serious allegations relating to customer losses that have been lodged against other day-trading firms. Stock USA will contest the charges, he said.
“The NASD has an emphasis on day trading, so any day-trading case, regardless of the customer impact or severity of violations, is going to gain publicity,” he said.
The day-trading business has largely fallen out of the spotlight this year. And the NASD’s Goldsmith said the industry in general has done a better job of disclosing risks to potential customers.
In the case of All-Tech, however, employees promoted customer-to-customer loans as “basically guaranteed,” according to the NASD. A review of five All-Tech branches showed that, in the 13-month period ended in January 1999, there were 4,831 such loans totaling almost $131 million, the NASD said. In some cases, the loans were between customers of different branches who didn’t know each other, and were at “usurious rates,” the complaint says.
In one case, a customer defaulted on a $40,000 loan from another customer, the complaint said. All-Tech reached a settlement with the customer who made the loan, Lerner said.
All-Tech also allegedly allowed a person who had been barred from the securities industry in 1988 by the SEC to be a co-owner and de facto manager of its Chicago office.
Last week, in another strike at the industry by regulators, the SEC approved a rule requiring day-trading brokerages to extensively screen potential customers to assure that they’re appropriate for such fast-paced, high-stakes trading. The industry has argued that it is being unfairly targeted by authorities.
