May 19, 1999
 
 
 

                   SEC Censures Datek Online
                   For Dipping Into Client Funds

                   By ANN DAVIS and REBECCA BUCKMAN
                   Staff Reporters of THE WALL STREET JOURNAL

                   The U.S. Securities and Exchange Commission, in its first enforcement
                   action against an electronic brokerage firm, censured Datek Online
                   Brokerage Services Corp. for allegedly dipping into customers' funds to
                   cover its own trading obligations and trades by other customers.

                   Datek, the country's fourth-largest online broker, and its former chief
                   financial officer agreed to the censure Tuesday, without admitting or
                   denying the agency's findings. The unit of Datek Online Holdings Corp. of
                   Iselin, N.J., agreed to pay a $50,000 fine, and also agreed to hire an
                   independent consultant to monitor its controls and record-keeping.

                   Robert Bethge, Datek's chief marketing
                   officer, said Datek hired outside accounting
                   and legal experts to clean up what he called
                   inadvertent clerical errors after the SEC
                   discovered them last summer.

                   He said the alleged violations, which occurred last spring as the number of
                   investors using Datek's online system was growing exponentially, occurred
                   mainly because of a "bad calculation" of how much the firm had to deposit
                   in its customer reserve fund. He emphasized that no customer monies were
                   lost, adding: "There was certainly no ill intent, no malice on our part."

                   Henry Klehm, the SEC's senior associate regional director in New York,
                   said the actions Datek was censured for were quite serious. If the stock
                   market had plunged, customers may have walked away from trades,
                   leaving Datek obligated but unable to pay for all of them, he said. "In a
                   highly volatile market," he added, "it's very important" that brokerage firms
                   keep the required cash on hand.

                   Federal securities laws require broker-dealers to keep customers' funds in
                   a special reserve account, if the amounts owed to customers for such
                   things as trading profits exceed what customers owe on other trades.
                   Datek improperly used as much as $42.7 million in special reserve account
                   funds in a single day and falsified records on several occasions to conceal
                   the cash crunch, according to the SEC administrative order filed in
                   Washington.

                   Mr. Klehm noted that SEC officials have publicly expressed "similar
                   concerns" about other online brokerage firms.

                   The settlement comes at an awkward moment for Datek and its holding
                   company, which has been in separate talks with the SEC over plans to turn
                   its Island electronic-trading network into a full-fledged stock exchange.
                   Island is an electronic trading system that matches customer buy and sell
                   orders and is seeking to compete with traditional stock exchanges.

                   Securities analyst James Marks of Deutsche Bank Securities Inc. in New
                   York said the alleged violations may "undercut" Datek's ability to generate
                   confidence among regulators in its bid to launch Island as a full-fledged
                   exchange.

                   But Datek's Mr. Bethge said the settlement is "not changing business at
                   all." As for Island's exchange petition and Datek's larger plans for growth,
                   "certainly, all those issues are proceeding on the same schedule they were,"
                   he said.

                   Datek also has faced other setbacks recently, scotching plans to go public
                   last year amid publicity over separate regulatory problems at a unit it has
                   since sold. Since the problems came to light last spring, Datek hired a new
                   president for its brokerage unit -- Edward J. Nicoll, one of the founders of
                   Waterhouse Securities Inc. -- and implemented new management controls.
                   Analysts say the firm was trying to shore up its credibility and distance
                   itself from its former securities unit, which focused on rapid-fire trading
                   through Nasdaq's small-order execution system.

                   Datek, which charges a base commission of just $9.99 a trade, has quickly
                   captured a large chunk of the competitive online market. At the end of the
                   first quarter, it had about 205,000 customer accounts that generated more
                   than 50,000 trades a day, according to figures from U.S. Bancorp Piper
                   Jaffray Inc. Datek says it also clears trades for other brokerage firms,
                   bringing the number of trades it clears daily to over half a million.

                   In Tuesday's censure agreement with the SEC, Datek's former chief
                   financial officer, Moishe Zelcer, who resigned from the firm last July,
                   agreed to pay a $10,000 fine. Mr. Zelcer was also suspended from
                   association with a broker-dealer for 90 days. Attempts to reach Mr.
                   Zelcer for comment were unsuccessful.