NEW YORK (CNNfn) - Day trading faced the harsh light of congressional scrutiny Thursday, as the first day of a two-day hearing before the Senate Permanent Subcommittee of Investigations got under way on Capitol Hill.|
An eight-month investigation of 19 day-trading companies launched by the subcommittee revealed a litany of violations and suspect behavior. The study concluded that many day-trading companies act in illegal or inappropriate ways.
Specifically, the Senate investigation uncovered potentially illegal acts at day trading companies such as forgery, unauthorized trading and documents that had been altered.
But the "most disturbing" evidence, according to the investigation findings, points to day-trading practices that are entirely legal but highly questionable.
The hearings, subtitled "Day Trading: Everyone Gambles But the House" and led by Sen. Susan Collins, R-Maine, were widely expected to be highly critical of the industry. So far they have lived up to that billing. Day-trading had already come under scrutiny on a number of fronts, particularly from regulators.
The industry will have its day on Friday , when three day-trading executives are slated to speak. Three regulators will also speak.
Harvey Houtkin, CEO of All-Tech Direct and a high-profile mouthpiece of the day-trading industry, is scheduled to speak tomorrow. But he told CNNfn.com he was suspicious of the motives behind the hearing.
"I'm seriously considering not going, because I don't want to be part of an ambush," he said. "To go there now and just be railroaded is kind of crazy. If I want to go to a crucifixion, I'll practice religion."
He discounted the findings of the investigation. "For eight months, they searched for a few people to come forward with a few negative problems," he said. He said there had been no effort to find evidence from people who had positive experiences day trading.
According to the investigation, many companies allow and even encourage unsuitable and undercapitalized customers to trade. It also found that day-trading companies allow unlicensed or inadequately trained managers to manage their offices.
The investigation also found that day-trading companies charge "exorbitant" commissions. That means day traders have to "spend much of their time and capital" trying to break even. Day-trading companies also underplayed the risks involved in day trading to encourage unsuitable people to trade.
One company, Providential Securities, disregarded its compliance manual and did not gather financial information from its traders, according to the Senate findings. At another company, Terra Nova Trading, officials changed new-account documents to inflate a customer's net worth and income to meet minimum requirements, the report states.
Houtkin worried that the subcommittee had already reached its verdict on the industry and was engaging in a witch hunt.
"It looks like this day is going to be basically prostituted by people who have an agenda," Houtkin said. "I would love to meet in a public forum where this thing can be discussed impartially. But it seems to me that can't be done." He also worried that if he didn't attend the hearings, some might speculate that he had was intimidated.
The first day of the hearings featured witnesses including a number of former customers and managers from Montvale, N.J.-based All-Tech, Houston-based Momentum Securities and Fountain Valley, Calif.-based Providential Securities.
Perhaps the most provocative witness to address the committee was Alyce Wenzel, the mother of Scott Webb, a trader shot by Mark Barton. In July last year, Barton went on a shooting spree at the Atlanta offices of Momentum Securities and All-Tech.
Reached by phone, Jim Lee, president of the trade group the Electronic Traders Association and the day-trading company Momentum Securities, declined to comment on the hearings before he also speaks tomorrow.
The hearings start two days after the Securities and Exchange Commission sued Houtkin's company, Montvale, N.J.-based All-Tech Direct, and a small Miami-based day-trading shop for violating margin rules. According to Houtkin, the suits were timed to shed a poor light on day trading ahead of the hearings.
Though those were the first SEC enforcement actions taken against day-trading companies for margin violations, regulators have often claimed day trading companies abuse margin and make questionable loans to their customers.
Trading on borrowed money, or margin, is a vital tool for day traders. Regulators have often contended that day-trading companies encourage traders facing losses to trade beyond their means, or even in violation of federal margin laws, by arranging loans between day-trading customers or from the company itself.
Investment Street Co., subject of the second suit, settled the charges with the SEC. All-Tech says it will contest them.
"We intend to defend ourselves in the appropriate way and we believe we will be exonerated," Franklin Ogele, All-Tech associate general counsel, told CNNfn.com on Tuesday.