February 25, 2000
NASD Regulation Inc., the regulatory arm of the National Association of Securities Dealers Inc., filed charges yesterday in eight online day-trading cases with violations ranging from misuse of customer funds and improper lending to misleading advertising.
Those charged are Richardson, Texas-based 1-800DAYTRADE.COM Inc.; Donnelly & Co. of Midland, Texas; Austin, Texas-based Self Trading Securities Inc.; Chicago's LaSalle St. Securities L.L.C.; Heath A. Butler and Don A. Rouzan of New Orleans; Dallas-based Addison Securities Inc.; James Han, formerly with Houston-based Landmark Securities Corp.; and Austin-based Choice Investments Inc..
Barry Goldsmith, NASD Regulation's executive vice president for enforcement, said in a statement that the Washington-based regulator does not want to discourage individual day trading, but said that the practice "is a highly risky form of trading that requires new regulatory initiatives and close attention by securities regulators."
Goldsmith, who testified before the Senate Committee on Governmental Affairs' Permanent Subcommittee on Investigations today, said that the eight new cases are an example of the National Association of Securities Dealers' commitment to enforcing regulatory compliance among member firms.
Two of the cases involved allegations of misuse of funds, including charges that the owner of a day-trading management company solicited more than $150,000 from outside investors, falsely representing that the money would be used for "risk-free" loans to day-trading customers of the firm.
In addition, investors in the day-trading firms were promised returns of at least 15% to 20% of the profits earned by the day traders. Instead, the money invested in the firms was allegedly loaned to day traders with no controls or restrictions or was improperly used for branch operating expenses, and the investors eventually lost their money.
In two other cases, NASD-R discovered margin violations, including one in which the principal of a day-trading firm allowed a customer to conduct 120 transactions after the customer's account was coded "no more business" by the clearing firm for failing to meet a margin call.
A "margin call" demands that an investor have enough money or securities on deposit to meet the minimum requirements set by a brokerage or regulator.
To address the risks presented by day-trading, NASD-R has proposed rules in the areas of risk disclosure, determining appropriate behavior, and margin requirements for day traders. In particular, NASD-R has proposed new rules to require that firms that promote day-trading to individuals fully disclose the risks involved as well as assess whether such a strategy is "appropriate" for the individual.
NASD-R is also working closely with the New York Stock Exchange Inc. to amend margin requirements for day traders in order to promote the safety and soundness of member firms that use credit to finance day-trading activities.
Five firms have settled the charges with NASD-R and agreed to pay fines ranging from $13,000 to $37,500.
The biggest settlement involved Addison Securities, which agreed to pay $37,500 without admitting or denying allegations of executing trades without written authorization, signing customers' names to documents and short sale rules violations.
On its Web site, the company promises "solid broker-client relationships rooted in honesty, integrity and performance," but when contacted by phone today, company officials refused to comment on the charges.
1-800DAYTRADE.COM agreed to pay $25,000 without admitting or denying allegations that included exaggerated advertisements, failure to register traders, short sale violations, and failing to maintain accurate records and supervisory procedures.
Choice Investments agreed to pay $27,000 without admitting or denying allegations of short sale violations, equity security trades without proper registration, and an instance in which a customer whose clearance was suspended was allowed to continue trading,
Donnelly & Co. agreed to pay $17,500 without admitting or denying allegations of exaggerated advertisements, failing to adhere to continuing education requirements and failing to maintain adequate supervisory procedures.
LaSalle St. Securities agreed to pay $13,000 without admitting or denying allegations of exaggerated advertisements, reporting violations and failure to document approval of new day-trading accounts.