UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION Securities Exchange Act of 1934 Release No. 41417 / May 18, 1999 Administrative Proceedings File No. 3-9901 ____________________________________ : In The Matter Of : ORDER INSTITUTING PUBLIC : ADMINISTRATIVE PROCEEDINGS, DATEK ONLINE BROKERAGE : MAKING FINDINGS, IMPOSING SERVICES CORP. and : REMEDIAL SANCTIONS AND MOISHE ZELCER, : ISSUING CEASE-AND-DESIST : ORDER Respondents. : ____________________________________: I. The Securities and Exchange Commission ("Commission") deems it appropriate and in the public interest that public administrative proceedings be instituted against Datek Online Brokerage Services Corp. ("Datek") and Moishe Zelcer ("Zelcer") pursuant to Sections 15(b), 19(h) and 21C of the Securities Exchange Act of 1934 ("Exchange Act"). Accordingly, it is hereby ordered that proceedings pursuant to Sections 15(b), 19(h) and 21C of the Exchange Act be, and hereby are, instituted. II. In anticipation of the institution of these proceedings, Datek and Zelcer have submitted Offers of Settlement ("Offers"), which the Commission has determined to accept. Solely for the purpose of these proceedings and any other proceeding brought by or on behalf of the Commission, or in which the Commission is a party, and without admitting or denying the findings contained herein, except for the jurisdiction of the Commission over it and over the subject matter of these proceedings, which are admitted, both Datek and Zelcer consent to the entry of the findings, a cease and desist order, and the imposition of the remedial sanctions set forth herein. III. On the basis of this Order and the Offers submitted by Datek and Zelcer, the Commission finds that: Respondents A. Datek, which is located in Iselin, New Jersey, is a broker-dealer registered with the Commission pursuant to Section 15(b) of the Exchange Act. Datek is a member of the National Association of Securities Dealers, Inc. ("NASD") and the Boston Stock Exchange. At the time of the events alleged herein, Datek was a self-clearing broker-dealer that also cleared transactions for other broker-dealers. B. Zelcer, age 53, at all relevant times, was Datek’s Chief Financial Officer ("CFO") and Financial Operations Principal ("FINOP"). Zelcer is registered with the NASD as a general securities principal, a FINOP and as a general securities representative. Introduction C. Datek is a broker-dealer that provides a medium through which investors can place orders with Datek over the Internet to execute securities transactions. As trading through the Internet has gained popularity, Datek’s volume of daily transactions has increased. As will be described below, while conducting its on- line trading business, Datek has violated certain provisions of the customer protection and books and records requirements of the Exchange Act. Datek’s Failure to Comply With the Customer Protection Rule D. On April 24, 1998 and on 11 other days between March 9, 1998 and May 8, 1998, Datek willfully violated Section 15(c)(3) of the Exchange Act and Rule 15c3-3 in that, by use of the mails, or means or instrumentalities of interstate commerce, Datek effected transactions in, or induced or attempted to induce the purchase or sale of, securities (other than an exempted security (except a government security) or commercial paper, bankers’ acceptances or commercial bills) in contravention of the rules and regulations prescribed by the Commission as necessary or appropriate in the public interest or for the protection of investors to provide safeguards with respect to the financial responsibility and related practices of brokers and dealers. In particular: 1. Exchange Act Rule 15c3-3(e) requires a broker- dealer to establish a segregated bank account ("Special Reserve Bank Account for The Exclusive Benefit of Customers" (hereinafter the "Reserve Bank Account")) in which the broker-dealer deposits funds in the amount by which customer credits (i.e., monies owed by the broker-dealer to its customers) exceed customer debits (i.e., monies owed to the broker-dealer by its customers). The deposit of this excess amount of funds in the Reserve Bank Account ensures that the broker-dealer will not utilize customer monies in its operations. a. On April 24, 1998, Datek failed to maintain the minimum required balance of $196,126,088 in its Reserve Bank Account. On April 24, 1998, Datek maintained only $169,220,139, a deficiency of $26,905,949. b. Additionally, on 11 other days during the period between March 9, 1998 and May 8, 1998, Datek failed to maintain the required balance in its Reserve Bank Account. The deficiencies ranged from $2,201,936 to $42,709,435. 2. Exchange Act Rule 15c3-3(g) requires a broker- dealer to record a reserve formula computation for its Reserve Bank Account for any business day on which it makes a withdrawal from such account. On several occasions, Datek withdrew cash from its Reserve Bank Account to meet its own financial obligations, which arose at least in part from customer trading activity. On 14 separate occasions between March 5, 1998 and May 8, 1998, Datek made withdrawals from its Reserve Bank Account and failed to make and record the required reserve formula computation. 3. Exchange Act Rule 15c3-3(d) requires a broker- dealer to determine the daily amount of customer fully paid securities and excess margin securities in its possession and control, and the amount of such securities not in its possession or control, using data as of the close of the business day. The purpose of this rule is to ensure that a broker-dealer does not place at risk assets belonging to its customers. On April 24, 1998, Datek inaccurately calculated the amount of customer fully paid securities and excess margin securities in its possession or control in 19 customer accounts. Datek’s computer system calculated the amount of customer fully paid securities and excess margin securities in its possession or control using mid- day data rather than using as of the close of the business day data. Datek’s Violations of the Record Keeping and Notice Provisions E. Datek willfully violated Section 17(a) of the Exchange Act and Rule 17a-5 which require registered broker-dealers to file monthly Part II of the Financial Operational Combined Uniform Single Report ("FOCUS report") that contains an accurate computation of the broker-dealer’s net capital. In particular, Datek filed a FOCUS report for the period ended April 24, 1998 that contained an inaccurate computation of its net capital. Datek reported that it had excess net capital in the amount of $6,948,167. In fact, Datek had only $419,227 more than its minimum net capital requirement of $22,488,507. Datek’s net capital computation was incorrect in that Datek: i) understated its aggregate indebtedness and overstated its exclusions from aggregate indebtedness; ii) overstated its allowable assets by misclassifying as allowable assets four receivables including an unsecured receivable of $3,500,000 for the sale of Datek’s trading unit; and iii) failed to take a haircut charge on Datek’s investment in a money market fund. F. Datek willfully violated Section 17(a) of the Exchange Act and Rules 17a-3(a)(2), 17a-3(a)(3), and 17a-3(a)(11), which require registered broker-dealers to make and keep certain books and records. These rules require a registered broker-dealer to maintain records that: (1) reflect all of the broker-dealer’s assets and liabilities, income and expense and capital accounts; (2) itemize activity in each customer’s, and the broker-dealer’s, cash and margin accounts; and (3) reflect proof of money balances in all ledger accounts and a record of the broker-dealer’s aggregate indebtedness and net capital. In particular, on April 24, 1998, Datek’s trial balances, general ledgers, and customer account ledgers were inaccurate. As stated in Section III.E, Datek also created inaccurate computations of its aggregate indebtedness and net capital. G. Datek willfully violated Sections 15(c) and 17(a) of the Exchange Act and Rules 15c3-3(i), 17a-11(c)(1) and 17a-11(d) which require registered broker-dealers to notify the Commission and the appropriate self-regulatory organization in certain circumstances. In particular: 1. Exchange Act Rule 17a-11(c)(1) requires a registered broker-dealer to notify the Commission and the appropriate self-regulatory organization if its aggregate indebtedness is in excess of 1,200% of its net capital. On April 24, 1998, Datek’s aggregate indebtedness equaled 1,472% of its net capital. Datek, however, failed to notify the Commission or the NASD that its aggregate indebtedness exceeded 1,200% of its net capital. 2. Exchange Act Rule 17a-11(d) provides that if a registered broker-dealer fails to make and keep current books and records as required by Exchange Act Rule 17a-3, it shall give notice to the Commission and the appropriate self-regulatory organization specifying which books and records have not been kept current, and the broker-dealer shall transmit a report within forty-eight hours of the notice stating what it has done, or is doing, to correct the situation. As stated in Section III.F. above, in April 1998, Datek failed to accurately maintain certain of its required books and records. Datek failed to notify the Commission or the NASD of this failure, as well as what Datek had done, or was doing, to correct the situation. 3. Exchange Act Rule 15c3-3(i) requires a registered broker-dealer that fails to make a required deposit in its Reserve Bank Account to promptly notify the Commission and the appropriate self-regulatory organization and confirm this notice in writing. As stated in Section III.D.1 above, Datek failed to maintain the required balance in its Reserve Bank Account on 12 occasions from March through May 1998. Datek failed to notify the Commission or the NASD of these failures. H. Datek willfully violated Section 17(a) of the Exchange Act and Rule 17a-4, which require a registered broker-dealer to maintain and preserve certain books and records. Exchange Act Rule 17a-4(f)(2)(ii) permits a broker-dealer to maintain and preserve these books and records by means of "electronic storage media," but the records must be preserved exclusively in a non- rewriteable, non-erasable format. From at least March 1998 through May 1998, Datek maintained and preserved certain of its required books and records solely on its server’s hard drive, an electronic storage media that was both rewriteable and erasable. I. Datek willfully violated Section 17(b) of the Exchange Act which requires a registered broker-dealer to provide representatives of the Commission with prompt access to records required to be kept pursuant to Section 17(a) of the Exchange Act during periodic or special examinations. From June 4, 1998 through June 30, 1998, Datek failed to provide the Commission staff with prompt access to various required books and records. Zelcer’s Aiding and Abetting Violations J. Zelcer willfully aided and abetted, and was a cause of, Datek’s violations of Sections 15(c), 17(a) and 17(b) of the Exchange Act and Rules 15c3-3, 17a-3, 17a-4, 17a-5 and 17a-11. In particular: K. As Datek’s CFO and FINOP, Zelcer was responsible for Datek’s compliance with the books and records requirements (Exchange Act Rules 17a-3 and 17a-4); the net capital requirements including the preparation of the FOCUS reports (Exchange Act Rule 17a-5); the customer protection requirements (Exchange Act Rule 15c3-3); and the notice requirements (Exchange Act Rules 15c3-3 and 17a-11) at the time of the violations described in Sections III.D-I. L. Zelcer incorrectly prepared Datek’s net capital computations for the period ended April 24, 1998, as well as Datek’s FOCUS report for the period ended April 24, 1998. M. Zelcer, who computed Datek’s customer reserve formula and monitored the use of funds in Datek’s Reserve Bank Account: (1) improperly calculated Datek’s customer reserve formula; (2) failed to insure that Datek maintained the required balance in its Reserve Bank Account; and (3) failed to insure that Datek did not remove funds from the Reserve Bank Account without recalculating the customer reserve formula. N. Zelcer failed to calculate properly the amount of customer fully paid securities and excess margin securities. O. Zelcer, who routinely reviewed Datek’s books and records, failed to insure that Datek’s trial balances and general ledgers were accurate. P. Zelcer failed to insure that Datek provided notice to the Commission or the NASD that: (1) Datek’s aggregate indebtedness exceeded 1,200% of its net capital; (2) Datek failed to maintain the required balance in its Reserve Bank Account; and (3) Datek’s books and records for April 1998 were inaccurate. Q. Zelcer failed to insure that Datek maintained certain books and records and therefore Datek could not provide the Commission with prompt access to these books and records. R. Zelcer failed to insure that Datek maintained required books and records either in a paper format or, if stored solely in an electronic storage media, in a format that was both non- rewriteable and non-erasable. IV. In view of the foregoing, it is in the public interest to impose the sanctions specified in the Offer of Settlement. Accordingly, IT IS HEREBY ORDERED that: A. Datek be, and hereby is, censured. B. Datek cease and desist, pursuant to Section 21C of the Exchange Act, from committing or causing any violation and any future violation of Sections 15(c), 17(a) and 17(b) of the Exchange Act and Rules 15c3-3, 17a-3, 17a-4, 17a-5 and 17a-11 thereunder. C. Datek shall, within ten days of the entry of this Order, pay a civil money penalty in the amount of $50,000 to the United States Treasury. Such payment shall be: (1) made by United States postal money order, certified check, bank cashier’s check, or bank money order; (2) made payable to the Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter which identifies Datek as a Respondent in this proceeding, and the Commission’s case number, a copy of which cover letter and money order or check shall be sent to Kay Lackey, Assistant Regional Director, Northeast Regional Office, Securities and Exchange Commission, 7 World Trade Center, 13th Floor, New York, N.Y. 10048. D. Datek (or, in the event that Datek’s clearance and settlement operations are transferred to an affiliated broker- dealer (the "Affiliate") prior to Datek’s completing each of the following undertakings, then the Affiliate, to the extent that such undertakings have not been completed), shall comply with the following undertakings: 1. Within 30 days of the date of this Order, Datek shall establish a Reserve Formula Review Committee ("the Committee") to review its weekly reserve formula computation prepared pursuant to Rule 15c3-3(e)(3) for a period of one year beginning one week following the issuance of this Order. The Committee will be comprised of the following Datek personnel: Chief Financial Officer, Vice President of Regulatory Reporting, Director of Operations, Manager of Operations Regulatory Control, Vice President of Operations Control, Vice President of Cashiering Services and the Financial and Operations Principal ("FINOP") (or, if any of the aforementioned positions are vacant or eliminated, or if any of the position titles are changed or are eliminated, such persons as Datek may determine, with the consent of the Commission’s Northeast Regional Office ("NERO") staff, who perform the same functions or have the same responsibilities as the persons who have filled the aforementioned positions during the past one year). 2. Within 30 days of the date of this Order, Datek shall employ an independent consultant ("Independent Consultant"), knowledgeable in all aspects of broker-dealer operations, including, but not limited to, the customer protection and books and records rules promulgated under the Exchange Act, and not unacceptable to the staff of the NERO, (a) to conduct a review of and make findings regarding Datek’s internal controls, policies, practices, and procedures reasonably designed to detect and prevent the types of violations of Rules 15c3-3, 17a-3, 17a-4, 17a-5, and 17a-11 described in this Order, (b) to conduct a review of any internal controls, policies, practices and procedures that Datek has adopted and implemented since the activities described in this Order, to determine whether and to what extent there is a need for additional or amended policies and procedures designed reasonably to detect and prevent, insofar as practicable such violations; and (c) to make findings regarding any additional internal controls, policies, or procedures which the Independent Consultant believes are necessary to provide reasonable assurance that Datek can detect and prevent the types of violations of Rules 15c3-3, 17a-3, 17a- 4, 17a-5, and 17a-11 described in this Order. Such Independent Consultant shall be entitled, to the extent that he or she deems appropriate, to rely upon work previously performed or to be performed by Deloitte & Touche LLP. 3. Datek shall promptly provide the Independent Consultant with any and all requested documents and other information pertaining to Datek’s brokerage operations (other than materials or information protected by a valid claim of attorney-client privilege or attorney work product), and permit the Independent Consultant to meet with any officer, agent, or employee of Datek. 4. No later than three months from the date that Datek employs the Independent Consultant, the Independent Consultant will submit, in writing, to Datek, with a copy to NERO, his or her report detailing his or her findings regarding Datek’s internal controls, policies, practices, and procedures and his or her recommendations, if any, for revised or additional measures reasonably designed to detect and prevent the types of violations of Rules 15c3-3, 17a-3, 17a-4, 17a-5 and 17a-11 described in this Order. 5. Upon good cause being shown, the staff of NERO may grant the Independent Consultant such additional time as the staff deems necessary to submit his or her report regarding Datek’s internal controls, policies, practices, and procedures, and his or her recommendations, if any, for revised or additional measures reasonably designed to detect and prevent the types of violations of Rules 15c3-3, 17a-3, 17a-4, 17a-5, and 17a-11 described in this Order. 6. Within 30 days after the date of the issuance of the Independent Consultant’s report, Datek shall remedy any deficiencies in its internal controls, policies, practices, or procedures identified by the Independent Consultant and adopt, implement, and maintain any revised or additional measures recommended by the Independent Consultant, or alternatives proposed in writing by Datek and accepted in writing by the Independent Consultant or the staff of NERO. Upon written request and good cause being shown, the staff of NERO or the Independent Consultant may grant Datek such additional time as the staff or the Independent Consultant deems necessary to remedy such deficiencies or adopt such measures or alternatives. 7. No later than 30 days from the date of the issuance of the Independent Consultant’s report (or from such date as Datek is allowed by the staff of NERO or the Independent Consultant to remedy such defiencies or adopt such measures or alternatives pursuant to Section IV.D.6), Datek, through an officer, shall file an affidavit with the staff of NERO stating that Datek has remedied any deficiencies in its internal controls, policies, practices, and procedures identified by the Independent Consultant (stating the means by which such remedy has been accomplished), and stating further that Datek has adopted, implemented, and will maintain any revised or additional internal controls, policies, practices, or procedures recommended in the Independent Consultant’s report, or the alternatives proposed in writing by Datek and accepted in writing by the Independent Consultant or the staff of NERO. Upon written request and good cause being shown, the staff of NERO may grant Datek such additional time as the staff deems necessary to submit an affidavit. 8. The Independent Consultant shall review Datek’s implementation of the recommendations contained in the Independent Consultant’s report, or such alternatives proposed in writing by Datek and accepted in writing by the Independent Consultant or the staff of NERO. This review by the Independent Consultant shall take place on the following two occasions, within 30 days after (a) the first year anniversary of the date of the affidavit described in Section IV.D.7 and (b) the second year anniversary of the date of such affidavit, commencing on a date selected by the Independent Consultant. Within 30 days after the commencement of such review, the Independent Consultant shall report his or her findings to the staff of NERO and Datek. Upon good cause being shown, the staff of NERO may grant the Independent Consultant such additional time as the staff deems necessary to submit his or her report. 9. For the period of engagement and for a period of two years from completion of the engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-client, auditing or other professional relationship with Datek, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as representatives of Datek. Any firm with which the Independent Consultant is affiliated or of which he/she is a member, and any person engaged to assist the Independent Consultant in performance of his/her duties under this Order shall not, without prior written consent of the NERO, enter into any employment, consultant, attorney-client, auditing or other professional relationship with Datek, or any of its present or former affiliates, directors, officers, employees, or agents acting in their capacity as representatives of Datek for the period of the engagement and for a period of two years after the engagement is completed. IT IS FURTHER ORDERED, that: A. Zelcer be, and hereby is, censured. B. Zelcer cease and desist, pursuant to Section 21C of the Exchange Act, from causing any violation and any future violation of Sections 15(c), 17(a) and 17(b) of the Exchange Act and Rules 15c3-3, 17a-3, 17a-4, 17a-5 and 17a-11 thereunder. C. Zelcer be, and hereby is, suspended from association with a broker-dealer for a period of 90 days beginning on the second Monday after the entry of this Order. D. Within 30 days after the end of his 90 day suspension described above, Zelcer shall deliver an affidavit to the staff of NERO stating that he has complied with the terms of his suspension. E. Zelcer shall, within ten days of the entry of this Order, pay a civil money penalty in the amount of $10,000 to the United States Treasury. Such payment shall be: (1) made by United States postal money order, certified check, bank cashier’s check, or bank money order; (2) made payable to the Securities and Exchange Commission; (3) hand-delivered or mailed to the Comptroller, Securities and Exchange Commission Operations Center, 6432 General Green Way, Stop 0-3, Alexandria, VA 22312; and (4) submitted under cover letter which identifies Zelcer as a Respondent in this proceeding, and the Commission’s case number, a copy of which cover letter and money order or check shall be sent to Kay Lackey, Assistant Regional Director, Northeast Regional Office, Securities and Exchange Commission, 7 World Trade Center, 13th Floor, New York, N.Y. 10048. By the Commission. Jonathan G. Katz Secretary