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Vulcan passes on Datek
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July 22, 1999: 7:27 p.m. ET
Venture capital fund run by Paul Allen decides against investing in online broker
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NEW YORK (CNNfn) - Vulcan Ventures, the investment firm run by Microsoft Corp. co-founder Paul Allen, canceled plans to invest millions in Datek Online Holdings Inc. this week after developing last minute concerns in its due diligence process.
Susan Pierson Brown, a spokeswoman for the Bellevue, Wa.-based venture capital fund, confirmed Vulcan pulled out of a planned $300 million investment plan that included French investment group Groupe Arnault and Boston-based TA Associates, but would not comment on what lead to the decision.
However, a source close to the company said the decision was made after Datek, an online brokerage based in New Jersey, passed along financial and legal information that raised concerns among Vulcan officials.
Datek separately closed funding arrangements with the other two groups Wednesday, although at a reduced level of $195 million. In exchange for their investments, both Groupe Arnault and TA Associates will gain a seat on the company's expanded eight-member board and play a role in future strategic partnerships.
A Datek spokesman would not divulge how much each company had invested, but originally Groupe Arnault - a group headed by French entrepreneur Bernard Arnault - was expected to fund roughly half of the $300 million with TA Associates investing another $50 million to $75 million.
Vulcan likewise rescinded its offer to invest in Island E.C.N., an electronic stock exchange operated by Datek. An undetermined portion of the $195 million will be invested in that venture, Datek officials said.
Legal troubles dog Datek
Robert Bethge, Datek's chief operating officer, likewise would not expound on Vulcan's decision to withdraw its investment offer.
"All three of the investors are clearly highly-regarded and very experienced," he said. "We provided the same information to all three and two decide to move forward and one didn't."
Datek has a long history of regulatory and legal problems, including an investigation launched by the Manhattan District Attorney's office last year into whether the company had participated in a money laundering scheme. Federal agents have yet to release any conclusions from their investigation.
Separately, the New York Times noted Thursday that Datek was named, but not charged, in a Federal indictment handed down in a Florida court last month accusing five non-Datek individuals, including two with company ties, with mail and securities fraud and money laundering.
Bethge said company officials only recently learned of the suit, but noted "Datek is not involved in the subject matter of that case."
Finally, Datek agreed to pay a $50,000 fine in May after the U.S. Securities and Exchange Commission accused the company of using client's money to pay expenses and keeping shoddy financial records. The SEC also sanctioned Datek's former chief financial officer in connection with the case.
The company never admitted any guilt in relation to that investigation, and exactly one week later announced the deal with Vulcan Ventures and the other groups, apparently delaying a possible initial public offering.
Brown admitted it was unusual for Vulcan to announce a deal before completing a thorough investigation of the company, but said Vulcan decided to proceed with the announcement because the corresponding federal approval needed to complete the deal could drag on for months.
Datek: Steady the course
Bethge said the $105 million in lost investment would have no material impact on the company's operations or plans to fund its continued rapid growth. Datek is rated as the country's fourth-largest online brokerage in terms of market share.
As it stated previously, Datek plans to use the money to fund marketing, technology development and hiring efforts.
At this time, Bethge said "no plans are in place" relating to possible future investments or filing for an initial public offering, although the company is keeping its options open.
Datek originally filed to go public in 1998, but withdrew its request after the Manhattan District Attorney's office launched its investigation. After announcing the private investment deals in May, Datek President Edward J. Nicoll told CNNfn the funding would negate the need for an IPO anytime soon.
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Datek Online Holdings
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