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NY TIMES BUSINESS SECTION, MAY 10, 1998.
GOLDEN BOY?
Even by Wall Street standards, Jeffrey A. Citron is enormously
successful. He has a multimillion-dollar mansion on the Jersey Shore,
often commutes to work by helicopter and likes to fly to Florida in his
private Gulfstream jet. Now just 27 years old, he puts his net worth at
$100 million.
That is a mighty leap for a high school graduate who started working at
17 as an office clerk in a small Brooklyn brokerage firm called Datek
Securities. His big idea? While the giant investment houses were tied
up in ticker tape, he was automating stock trading operations and paving
the way to the $9.99 Internet trade. He even helped develop an
electronic stock exchange that has been hailed by officials at the
Nasdaq stock market and the Securities Exchange Commission as
"innovative" and "revolutionary."
Every so often, someone comes around who cracks the code on Wall
Street," said Bill Burnham, a stock analyst who tracks on-line brokerage
firms for Piper Jaffray. "And Citron just cracked the code."
Today, Mr. Citron is the chief executive of the Datek Online Holdings
Corporation, which grew out of Datek Securities to become one of the
nation's fastest-growing on-line brokerage firms. He has been heralded
as a "technology wizard" by Forbes magazine and as "one of the 20 most
important players on the financial Web" by Institutional Investor.
But as he steps into the spotlight, with plans to take his on-line
venture public, a darker tale is creeping out of the shadows, one that
raises troubling questions about Datek and threatens to undermine Mr.
Citron's stature as a Wall Street golden boy.
For behind Datek's burgeoning on-line empire in Iselin, N.J., is a
securities firm with a murky and blemished past - a record of
aggressive, and sometimes illegal, trading activity; of fines, censures
and suspensions, and of shadowy deals involving offshore accounts.
And not all of Datek's problems are history. S.E.C. officials are
investigating whether Datek was part of a stock manipulation scheme in
recent years involving the sale of securities to overseas investors,
according to investigators, law enforcement officials and a person
subpoenaed in the case. The office of the District Attorney, meanwhile,
says it is looking into whether Datek participated in a money laundering
scheme.
A group of former Datek employees questioned last month told the
District Attorney's office that as recently as 1997, the firm encouraged
trading practices that were highly profitable but that they believed
were prohibited by the National Association of Securities Dealers.
Then there are Mr. Citron's and Datek's connections to Robert E.
Brennan, the flamboyant penny-stock promoter whom a Federal judge, in a
civil case brought by the S.E.C., denounced in 1995 for engaging in "a
massive and continuing fraud" and who has been barred from the brokerage
industry.
Mr. Citron's mansion in Brielle, N.J., is built on the site of Mr.
Brennan's home, which Mr. Citron bought in 1996 for $3.3 million and
tore down. He also bought Mr. Brennan's jet, for $3.8 million. Mr.
Citron, however, denies that they have any other relationship.
And in papers filed in his bankruptcy case, Mr. Brennan said he had
borrowed $3 million from a company operated by Sheldon Maschler, the
chief trader at Datek from 1987 to 1996, and the man who hired Mr.
Citron into the firm. Earlier, Mr. Maschler had worked for Mr. Brennan.
Mr. Citron - who has sought recently to distance himself from both men -
vehemently denies that Datek has been involved in any wrong-doing. In a
statement last week, he called the accusations of money laundering and
stock manipulation "baseless" and "defamatory."
Former Datek employees say it is just the kind of inquiry Mr. Citron
appeared to be worried about last year when he took full charge of
Datek. Eager to take Datek Online public, associate say, Mr. Citron
has tightened management controls, outlawed many trading practices,
hired a major accounting firm and recently completed a spin-off of the
firm's trading unit, the center of most of the questioned practices.
Mr. Citron, who at 6 feet 2 inches is paunchy and personable rather than
imposing, prefers to talk about being a champion of the small investor
or about how the Internet is transforming the securities marketplace
than about Datek's troubled history. "We don't want to be associated
with that past, the past of Datek" he said in an interview last month.
"We're a different company now."
IN THE BEGINNING
A 'NATURAL' FORGES A STRATEGIC ALLIANCE
The past, it seems, has often been a difficult subject for Jeffrey
Citron. For instance, he tells at least two versions of his upbringing
on Staten Island.
In one interview, he described himself as the only son of middle-class
parents who worked in the insurance business. And as early as he could
recall, he was passionate about computers. "I was fascinated with
technology all through my life," he said. The interest in Wall Street
came later, he said, after a stock-picking contest in high school.
But in a later interview, when pressed, he acknowledged that his
father, Howard Citron, pleaded guilty in the early 1990's to falsifying
business records at Wakefield Securities, a small New York firm, in part
of what the Manhattan District Attorney called a "massive stock-rigging
scheme" that cost investors millions of dollars. Law enforcement
officials said his father was also a heavy gambler who served two months
in a Federal prison in 1991 for peddling cocaine.
The subject clearly unsettles the younger Mr. Citron, who says he fears
that others will draw false parallels. "My father should be no
reflection on my abilities," he said. "It only puts a blemish upon me."
It was however, his father's connections that led him to Wall Street.
Sheldon Maschler, who grew up with Howard Citron in Brooklyn and was a
close friend, ran a trading operation at Datek Securities. Jeffrey
Citron went to work there in 1988, a month after graduating from high
school. "While he was growing up, he'd see Shelly trading, and that
was the spark," said Mario Russo, a childhood friend.
Mr. Citron started as a clerk in a small Datek office a few blocks from
the New York Stock Exchange. "He was your typical office boy," said
Aaron Elbogen, a founder of Datek. "But at some point we realized he
was a very bright kid."
Soon Mr. Citron was trading, and those who remember say his analytic
bent made him a natural. "It wasn't too long before Jeffrey popped up
with his Mercedes," Mr. Russo said.
By the age of 20, Mr. Citron said, he had earned $1 million. His net
worth mushroomed a few years later, when he used his computer skills to
automate much of the daily brokerage operation.
His ally was a 20-something computer programmer named Joshua Levine,
another New Yorker who had found his way into Mr. Maschler's camp. "We
had a deal," Mr. Citron recalled. "I said, 'You teach me everything you
know about programming, and I'll teach you how to trade.'"
Although Mr. Levine had dropped out of high school, he was, by all
accounts, a programming genius - smart enough to build a stock quotation
system for Tiger Management, the hedge fund run by Julian H. Robertson
Jr.
Working out of the basement of Mr. Maschler's State Island home, where
Datek had moved its four-man trading operation in 1990, Mr. Citron and
Mr. Levine found faster, cheaper ways to broker stocks. "Me and Jeff
would come in at midnight," Mr. Levine said. "We would split the wires
on the Nasdaq monitor to serve several traders and save the
$50-a-monitor charge."
When Mr. Citron arrived on Wall Street in the late 1980's, his chief
complaint was all the paperwork. But no longer. "People didn't have to
come in at 5 A.M. anymore," he said. "The computers did everything.
'WHO IS THIS'
MINING A GLITCH,
STRIKING IT RICH
If computers could make the office more efficient and profitable, why
couldn't they do the same for the trading operation?
The logic was not lost on Mr. Citron. He told Mr. Levine about
arbitrage trading - buying and selling to profit from sometimes slight
differences in the prices of two similar but fluctuating assets, like a
warrant that carries the right to buy a stock and the underlying stock
itself. The two of them went to work. "We created a system that
alerted you to arbitrage," Mr. Levine says. "What that meant was that
if the stock went up you hit the lotto. And the first day we made like
a gazillion billion dollars."
Their big break, though, came with the Small Order Execution System, or
SOES, an electronic system that allows brokers to execute orders via a
computer rather than the telephone. It meant instantaneous execution.
Almost immediately, professional traders picked up on a glitch.
Because the system automatically executed orders at the prices listed by
market makers, those who were slow to update their prices could be
forced to execute an electronic order at an outdated price, even if it
meant a loss.
Harvey I. Houtkin, the founder of the All-Tech Investment Group in
Montvale, N.J., found a way to exploit the system. But Datek, under Mr.
Maschler's guidance, perfected it. And a program created by Mr. Citron
and Mr. Levine was so effective and efficient that Datek, armed with
just a few traders and computers, began racking up big profits.
Market makers complained that "rogue traders," or "SOES bandits," were
profiting unfairly from these inefficiencies. Regulators, though, made
only minor changes. As a result, the SOES trades created a small
revolution on Wall Street. Big brokerage houses were pummeled by small
firms in places like Jersey City and Brooklyn.
Datek soon became the biggest and richest of SOES firms. Legions of
aggressive traders, many of them Ivy League graduates, joined Datek on
the prospect of earning up to $750,000 in their first year. In 1996,
the firm had a trading profit of about $95 million, up from $3.8 million
in 1992. "The market makers hated Datek because they were making
millions," Mr. Houtkin recalled. "They were hated probably more than
any other firm on Wall Street."
One reason for Datek's success was its innovative software programs
like Watcher and the Monster Key - programs that other SOES houses
eventually licensed or mimicked. Mr. Citron and Mr. Levine, meanwhile,
created an array of companies to orbit around Datek, Including Smith
Wall Associates, a computer services concern that had sales of 4100
million in 1996. It was from many of these companies that the two say
they made much of their fortunes, tens of millions of dollars. They
even won over regulators by developing an electronic stock exchange
called Island, a system that now handles about 4 percent of all Nasdaq
trading volume.
The networks they built, particularly the ones that did SOES trading,
were so powerful that they strained the Nasdaq stock market's computer
operations. "We were saying, "Who is this?" said John T. Wall, a Nasdaq
executive, remembering days when Datek's computers flooded the market
with SOES orders. "We never saw the system used that way before."
CONNECTIONS
TIES TO A 'BAD BOY' OF WALL STREET
Datek's ascendance would not have been possible without Sheldon
Maschler. Now a 53-year old real estate developer in Boca Raton, Fla.,
Mr. Maschler declined to be interviewed for this article. But a few
things are clear: He is the link to Mr. Brennan, and his name comes up
again and again in accusations of stock manipulation and illegal trading
practices at Datek.
A self-described "bad boy" of Wall Street, Mr. Maschler-who once got
into a shouting match with Nasdaq officials at a news conference-worked
in the early 1980's at First Jersey Securities, the firm Mr. Brennan
brought to national prominence with television commercials that
encouraged small investors to "Come grow with us."
As early as the mid-1970's, Federal regulators were investigating
whether Mr. Brennan defrauded investors and helped inflate the prices of
stocks he owned. As a result, in 1983, Mr. Brennan, Mr. Maschler and
several other traders were accused in a civil suit by the S.E.C. of
manipulating the stock of Geosearch, a small New York concern that
handled oil and gas leases. Though First Jersey and the traders did not
admit to wrongdoing, they settled the case by agreeing to submit to
greater scrutiny.
After First Jersey Securities collapsed in 1987, Mr. Maschler opened a
trading operation at Datek Securities. He was an expert trader, friend
say, but also a defiant one. "Rules weren't rules for Shelly," said Mr.
Houtkin of All-Tech, a former partner of Mr. Maschler's. "Shelly had a
street mentality, and under him Datek always operated in the bowels of
the industry."
Indeed, Mr. Maschler's tenure as head trader at Datek is steeped in
infractions - fines, suspensions and violations of SOES trading rules.
In 1991, he was fined $25,000 by the N.A.S.D. and suspended from the
brokerage industry for 30 days. The next year, the N.A.S.D. penalized
him for "indecorous and abusive language" and violating a SOES trading
rule 690 times. For various violations in the early 1990's, he
eventually paid a $675,000 fine and was suspended for one year from the
industry. Datek and Mr. Citron, who worked alongside Mr. Maschler, were
also sanctioned. In 1996, Mr. Citron was fined $20,000 and suspended
for 20 days. Neither Mr. Maschler nor Mr. Citron admitted to any
wrongdoing.
Even though Mr. Maschler was suspended and shed all his Datek shares in
1996,current and former employees say Mr. Maschler remains a presence at
the firm. For example, although his one-year suspension began on Feb.
18, 1997, Datek traders say he continued to attend monthly meetings at a
Manhattan banquet room, and even spoke at one. In a written response to
a reporter's questions about Mr. Maschler's suspension, Datek officials
said he had not been involved in the firm since 1996, and that if he
visited, he attended only "social events, such as company parties, golf
outings and other similar events."
New charges have surfaced recently. Two weeks ago, the S.E.C. filed a
civil fraud suit contending that Mr. Maschler and four others, including
executives at the Alter Sales Company, an automotive firm in Florida,
collaborated in a 1993 scheme to sell unregistered Alter shares to a
fictitious foreign investor.
The suit contends that Mr. Maschler, serving as the Datek account
executive for the fictitious investor, failed to make adequate inquiries
to determine whether there were any restrictions on the sales of those
shares, the proceeds of which were later placed in offshore accounts.
The S.E.C> says it is seeking "disgorgement" of $6.5 million in illegal
profits from Mr. Maschler and others.
The Sovereign Equity Management Corporation of Boca Raton, Fla., a
brokerage firm that was closed down by the N.A.S.D. last year for
repeated infractions, was also named by the Government as a participant
in the scheme.
Datek itself is accused of doing something similar in 1996. Last year,
the Fortune Petroleum Company, now called Fortune Natural Resources,
sued Datek in Federal District Court in Manhattan, contending that the
firm manipulated its stock in conjunction with an overseas offering that
apparently benefited six foreign investors, who resold the shares
through a Datek account. The Israel Trading fund - a small New York
firm that has ceased operations - was also named in the suit.
The case is pending, and the S.E.C. is investigating whether Datek and
the Israel Trading Fund were involved in a stock manipulation scheme
dealing with overseas securities offerings, said a person who was
subpoenaed. Datek says it has moved to dismiss the suit but will
vigorously defend itself if necessary.
Three former Datek traders said that when they were questioned last
month by the office of the Manhattan District Attorney, they were asked
about the Israel Trading Fund, but an investigator said the focus was a
money laundering scheme.
The traders said they also told the investigators that as recently as
last year, they were encouraged by seasoned traders and managers at
Datek to engage in trading practices that they believed were prohibited
by the N.A.S.D. One example: so-called rapid-fire trading, which they
said involved using the SOES system to trade blocks of shares in sizes
forbidden by regulators and then using a computer to split the blocks,
thereby masking the size of the trades.
IN THE MIDDLE
MORE TRIALS AND TRIBULATIONS
Though not charged, Mr. Maschler has been subpoenaed in a civil case
against Mr. Brennan that is now approaching trial. The New Jersey
Attorney General's office says that in the early 1990's, several
brokerage firms controlled by Mr. Brennan manipulated the prices of
four stocks by trading them among themselves. Mr. Brennan,
investigators say, may have made up to $125 million.
"Datek was an intermediary in the movement of securities from Brennan
to the brokers he controlled," said Harlan I. Ettinger, deputy attorney
general in New Jersey. "We've alleged Maschler was the trader who
handled those transactions."
Mr. Maschler's ties to Mr. Brennan are certainly extensive. In a
deposition last year in his bankruptcy case, Mr. Brennan said he had an
account worth $2 million at two brokerage firms through a company he
owned called Pirates Associates. One of those firms, he said, was
Datek. Mr. Brennan also said that in 1996 he borrowed $3 million from
Elm Management, a real estate company owned by Mr. Maschler.
Mr. Citron said it was Mr. Maschler who told him Mr. Brennan's house
was for sale. In an interview last month, Mr. Citron said he did not
know Mr. Brennan and had met him only once. Asked later about reports
of other meetings, he acknowledged at least 11 encounters, including one
at a dinner party at Mr. Brennan's Juno Beach, Fla., mansion. "When I
said I met him once, I really meant under one event - the buying of his
house," Mr. Citron explained. "Because I bought his house, and
subsequently bought his plane, people try and make an association.
There is no relationship between me and Bob Brennan."
Mr. Citron said, moreover, that he does not admire Mr. Brennan, whose
history he calls "deplorable."
And Mr. Brennan issued a terse statement by fax, which read, in part:
"I am not now, nor have I ever been, involved in any way in managing,
advising, influencing or funding Datek, Mr. Citron or any other persons
associated with Datek."
Mr. Citron, who initially cooperated for this article, declined to
answer further questions last week. A lawyer representing Mr. Citron
left a telephone message requesting that publication be delayed and
saying that the allegations against Datek "are absolutely false."
MOVING ON
PLACING EGGS IN INTERNET BASKET
By all accounts, Jeffrey Citron is trying to distance himself and Datek
Online from Mr. Maschler, Mr. Brennan and the old SOES trading unit,
which has grown less profitable as the technology it developed has
become more widely available. In March, when he gave a reporter a tour
of Datek's offices, Mr. Citron did not include the trading floor. That
unit was being spun off, he said.
Later that month, Datek announced that the unit was being acquired by
Heartland Securities, a money management firm that shares a building
with Datek Online in Iselin. The owners are Mr. Elbogen and one of Mr.
Maschler's sons, Erik. Mr. Elbogen and Erik Maschler are also
shareholders in Datek Online.
Now, Internet trading is booming. And that is why analysts from big
Wall Street firms, which has so much disdain for SOES traders, see great
promise for Mr. Citron's new Datek.
"Everyone in the industry has their eye on Datek, " says Julio Gomez,
president of Gomez Advisors in Boston, which tracks on-line trading.
"They have a cult following among on-line investors."
Datek, which boasts the fastest execution of stock trading, is growing
rapidly. In early 1997, it had 10,000 customers. It now has 80,000,
who have more than $1.5 billion in Datek accounts.
Mr. Citron talks about Datek as a great "cost-cutting growth firm,"
with no fat and lots of computers. Wall Street analysts, eager to hear
the gospel, are dining with Mr. Citron and being offered helicopter
rides, said Scott Appleby, who tracks Internet and related companies for
ABN Amro.
After all, the mere mention of the Internet can send a stock soaring
these days.
Mr. Citron's message: that the Internet will be the new force in the
brokerage business, giving smaller investors more control over their
stock trades.
"Our mission is to empower the individual investor by bringing the
stock market to their desktop," Mr. Citron said. "When you look at the
Wall Street I began in the individual was left out. Brokers would
shovel anything at you, and you were in the dark."
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