Heartland, 6 Brokers to Pay Fines

From Bloomberg News

Day-trading firm Heartland Securities Corp. and six brokers agreed Tuesday to pay $70.2 million to settle regulatory charges that they made tens of millions of dollars in illegal profits by exploiting a Nasdaq Stock Market trading system 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 from 1993 to 2001, the Securities and Exchange Commission said. The defendants hid their trades by creating fictitious books and filing false regulatory reports.

“Brokers’ abuse of a trading system in a manner in which it wasn’t designed was very extensive, very flagrant,” associate SEC enforcement director Antonia Chion said.

Nasdaq designed the automated SOES system in the 1980s to give individual investors an opportunity to trade on a level playing field with large brokerages. The second-largest U.S. stock market 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.


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.

“The SEC is sending a very strong signal,” Georgetown University finance professor James Angel said. “They want to make an example of this firm.”

All the brokers charged worked for Datek Securities Corp., whose 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 New Jersey-based Heartland, where they continued their fraudulent 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.


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

Citron gained control of Datek five years ago. Sheldon Maschler once worked for Robert Brennan, the former owner of now-defunct penny-stock brokerage First Jersey Securities Inc. who has been permanently barred from the securities business for illegal sales tactics and price manipulation.

“All involved are satisfied with the resolution of this case and, most importantly, are pleased to be able to put this matter behind them,” said Ted Wells, Sheldon Maschler’s lawyer.

All the brokers charged Tuesday have been barred from the securities industry, though Elbogen and Zelcer can reapply after two years. Lawyers for the other defendants did not respond to requests for comment.

Datek Online merged last year with Ameritrade Holding Corp., an online brokerage.

“Heartland is very pleased to have resolved the case and put it behind us,” Aaron Marcu, a lawyer for Heartland, said.