NEW YORK (CNNfn) - The Securities and Exchange Commission Tuesday sued two day-trading companies, alleging that they had violated margin rules by lending too much money to their day-trading customers.|
The SEC sued Montvale, N.J.-based All-Tech Direct Inc., a high-profile day-trading company headed by Harvey Houtkin, and seven people connected with All-Tech. The SEC alleged that the seven people made 103 unsecured loans to customers so that they could meet margin calls totaling more than $3.6 million. Houtkin is not named in the SEC's case against All-Tech.
Also Tuesday, the SEC settled an administrative proceeding against Miami-based Investment Street Co. The SEC alleged Investment Street enabled day traders to "engage in a greater volume of trading, despite their lack of funds to meet margin requirements" between November 1997 and March 1999.
Commenting on the SEC allegation against All-Tech, Franklin Ogele, the company's associate general counsel, said, "We intend to defend ourselves vigorously in the appropriate way, and we believe we will be exonerated."
The SEC alleges that throughout 1998 All-Tech and the seven respondents made the loans by withdrawing money from the accounts of three employees: Ralph Zulferino, manager of All-Tech's Edison, N.J., office; David Waldman, who works in All-Tech's headquarters; and Adam Leeds, who works in All-Tech's San Diego office.
The SEC also alleges that four other individuals "aided and abetted" the violations of margin rules: Mark Shefts, All-Tech's president; Harry Lefkowitz, All-Tech's vice president of operations; Lisa Esposito, head of All-Tech's margin department; and Barry Parish, All-Tech's manager in the San Diego office.
And at Investment Street, one of its directors, Emilio Sardi, and its president, Javier Saenz, made at least 22 unsecured loans to customers to meet margin calls totaling $250,000, the SEC charged. Investment Street used money from accounts controlled by Sardi, the SEC said, to make loans so customers could meet margin calls.
Without admitting or denying any culpability, Investment Street and the two respondents, as well as the affiliated administrative company Dynamic Trading of Miami Inc., settled the charges. They agreed to cease-and-desist orders and undisclosed civil fines. Sardi and Saenz agreed to suspensions from being affiliated with a broker-dealer.
A margin call occurs when a customer who has been trading stocks on borrowed money, or margin, has suffered losses. If the losses reduce the trader's net worth below the limit required by the brokerage or by the law, the brokerage makes a margin call to the customer, asking him to sell stock or come up with additional money to cover the losses.
By loaning money to customers to meet margin calls, the SEC alleges that the brokerages allowed their customers to continue trading and generating commissions even when they could no longer afford to do so.
Margin is a vital tool for day traders, who use it to leverage their accounts and buy large blocks of stock, hoping to profit from small trades. Margin is a risky tool if the investments made on margin move against a trader because they increase the trader's exposure to losses.
Nasdaq and the New York Stock Exchange have proposed new rules on margin that are pending with the SEC. The new rules would increase the leverage a day trader is allowed on margin from 2:1 to 4:1, while at the same time tightening penalties for margin violations and providing a clearer definition of day trading.