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UNITED STATES DISTRICT COURT
Plaintiff Securities and Exchange Commission (the "Commission") alleges for its complaint against defendants, including individuals who directly or indirectly controlled the management and policies of Datek Securities Corporation and Heartland Securities Corporation, as follows: NATURE OF THE ACTION 1. This action involves two separate, yet similar, schemes to defraud. The first scheme was devised and orchestrated by Sheldon Maschler, Jeffrey A. Citron, Michael McCarty, and Erik Maschler, and involved the unlawful use of the Nasdaq Stock Market's Small Order Execution System ("SOES"). That scheme was carried out at Datek Securities Corporation ("Datek Securities") from at least 1993 through March 1998, and was continued at Heartland Securities Corporation ("Heartland") from April 1998 through June 2001. During that period, the SOES system was the only Nasdaq trading system that allowed for automatic execution, and it offered faster execution than any other system. At the time, National Association of Securities Dealers, Inc. ("NASD") rules restricted use of the SOES system to small retail customer orders and prohibited broker dealers from using SOES to trade for their own accounts. By fraudulent means, defendants Sheldon Maschler, Citron, McCarty, Erik Maschler, and Heartland used the SOES system to execute millions of proprietary trades, resulting in tens of millions of dollars in illegal profits. The great majority of these profits were paid to Sheldon Maschler and Citron, but other defendants profited as well. The fraudulent scheme was carefully planned and orchestrated, and was concealed from regulators through the use of sophisticated software, the creation of nominee accounts and fictitious books and records, and the filing of false reports with the Commission. Defendants Sheldon Maschler, Citron, McCarty, and Erik Maschler carried out the fraudulent scheme from 1993 to March 1998 while in control of Datek Securities. Defendants Sheldon Maschler, McCarty, and Erik Maschler carried out the scheme from April 1998 through June 2001 while in control of Heartland, which had purchased Datek Securities' day-trading business on March 30, 1998. Defendant Raft Investments, Inc. ("Raft") aided and abetted the SOES fraudulent scheme. 2. Defendants Aaron Elbogen and Moishe Zelcer aided and abetted violations of certain books and records and filing provisions of the federal securities laws in connection with payments by Datek Securities to Sheldon Maschler, Citron, and others. 3. In the second fraudulent scheme, defendants Sheldon Maschler, McCarty, Raft, and JES Management Corporation ("JES") made material misrepresentations to certain savings banks in connection with the banks' conversion from mutual ownership to stock ownership in 1997 and 1998. When a mutual savings bank converts to stock ownership, federal and state banking regulations require that the bank's account holders receive non-transferable subscription rights to purchase conversion stock before it becomes publicly traded. Defendants Sheldon Maschler andMcCarty, using funds supplied by defendants Raft and JES, entered into agreements with numerous account holders to obtain their subscription rights, which were then used to purchase shares of the banks' initial public offerings. As in the SOES scheme described above, defendants Sheldon Maschler, McCarty, Raft, and JES misrepresented to the savings banks that account holders were purchasing the conversion stock for their own accounts, when in fact the defendants themselves were purchasing the stock. After selling the conversion stock in the open market, defendants Sheldon Maschler, McCarty, Raft and JES unlawfully realized profits of $1,788,472. JURISDICTION AND VENUE 4. This Court has jurisdiction over this action pursuant to Sections 21(d)(1), 21(d)(3), 21(e), and 27 of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. §§ 78u(d)(1), 78u(d)3), 78u(e), and 78aa] and Sections 20(b), 20(d)(1) and 22(a) of the Securities Act of 1933 ("Securities Act") [15 U.S.C. §§ 77t(b), 77t(d)(1), and 77v(a)]. 5. Defendants, directly or indirectly, made use of the means and instrumentalities of interstate commerce, or of the mails, or of the facilities of a national securities exchange in connection with the transactions, acts, practices and courses of business alleged herein. 6. This Court properly has venue over this action because certain of the conduct at issue occurred in the Southern District of New York. 7. The Commission seeks to enjoin each defendant from engaging in the transactions, acts, practices, and courses of conduct alleged in this Complaint and transactions, acts, practices, and courses of conduct of similar purport and object, for payment of civil penalties by the defendants, for other equitable relief including, for certain defendants, disgorgement, and for such other and further relief as the Court may deem appropriate. DEFENDANTS 8. Sheldon Maschler ("Maschler" or "Sheldon Maschler"), 58, is a resident of Florida. Maschler joined Datek Securities as a trader in July 1987 and began the firm's day-trading business in the basement of his Staten Island home. From at least 1993 through March 1998, Maschler controlled the management and customer accounts. 9. Jeffrey A. Citron, 32, is a resident of New Jersey. Citron was registered at Datek Securities from July 1, 1988 through August 1992. Between November 1992 and December 1997, Citron was registered as the president and chief executive officer of Christian Klein & Cogburn, Inc. ("Christian Klein"), a broker-dealer registered with the Commission; however, Citron also acted as an unregistered supervisor and principal of Datek Securities during that period. From at least November 1993 through approximately March 1998, Citron controlled the management and policies of Datek Securities. 10. Michael McCarty, 39, is a resident of New Jersey. McCarty was employed by Datek Securities from 1987 through March 1998, and worked in the firm's Manhattan office beginning in 1992. By 1995, McCarty had become the branch manager of Datek Securities' Manhattan office and was also responsible for keeping the books and records of that office. From approximately 1993 through approximately March 1998, McCarty controlled the management and policies of Datek Securities. From April 1998 through June 2001, McCarty served as Heartland's president and chief financial officer, and controlled the management and policies of Heartland. In late 1999, McCarty acquired a minority position in Heartland. 11. Erik J. Maschler, 32, is a resident of New Jersey and a son of Sheldon Maschler. Between 1992 and March 1998, he was the head trader in Datek Securities' Manhattan office. From approximately 1992 through approximately March 1998, Erik Maschler controlled the management and policies of Datek Securities. From approximately April 1998 through approximately June 2001, Erik Maschler was executive vice president and chief executive officer of Heartland, and controlled the management and policies of Heartland. During the relevant period, Erik Maschler owned 33.3 percent of Heartland. 12. Heartland Securities Corporation ("Heartland") is a trading firm headquartered in New Jersey, and has been registered as a broker-dealer pursuant to Section 15(b) of the Exchange Act since April 18, 1997. On March 30, 1998, Heartland purchased the day-trading business formerly owned and operated by Datek Securities. During the relevant period, Heartland had offices in the same buildings as Datek Securities' Manhattan and New Jersey offices. Heartland initially was wholly owned by defendants Elbogen and Erik Maschler, but in late 1999, two of Sheldon Maschler's other sons and McCarty acquired a significant portion of Elbogen's ownership interest in the firm. 13. Aaron Elbogen, 54, is a resident of New York. Elbogen was president, chief executive officer, and a director of Datek Securities from October 1978 through March 1998. From April 1998 through December 1999, Elbogen was at various times Heartland's president, chief executive officer, chief compliance officer, and financial and operations principal ("FINOP"). From April 1998 through June 2001, Elbogen owned stock in Heartland. 14. Moishe Zelcer, 56, is a resident of New York. Zelcer was a director, vice president, chief compliance officer, FINOP, secretary, and treasurer of Datek Securities at various times from August 1984 through March 1998. On or about September 29, 2000, Zelcer became the president of King Financial Services, Inc. ("King Financial"), a broker-dealer registered with the Commission with offices in the same building as Datek Securities (and later Heartland). King Financial was founded by a day-trader who worked at both Datek Securities and Heartland. 15. Raft Investments, Inc. ("Raft") is a New Jersey corporation controlled by Sheldon Maschler during the relevant period and by Citron through at least May 1998. As described below, from approximately October 1996 through May 1998, Raft channeled at least $50 millionin funds to at least 125 nominee accounts at Datek Securities in furtherance of the fraudulent SOES trading scheme. From October 1996 through May 1998, Maschler personally loaned Raft nearly $40 million, and trusts established for Maschler's three sons (including Erik Maschler) made loans to Raft of $12.9 million, $12.75 million, and $12.85 million, respectively. Between October 1996 and October 1997, Citron individually loaned Raft $7.1 million, and, in January, 1998, an offshore trust created by Citron loaned Raft $5 million. In addition, Erik Maschler and another of Maschler's sons loaned Raft $2.5 million. Although the loans from Citron and his offshore trust were paid off by Raft in 1998, Raft continued to provide millions of dollars in funds to open and maintain nominee accounts at Heartland though June 2001. 16. JES Management Corporation ("JES") is a Florida corporation that was wholly owned by Sheldon Maschler from 1996 through 1998. During that time, Maschler was JES's president and sole shareholder. OTHER RELEVANT ENTITIES 17. Datek Securities Corporation ("Datek Securities") has been registered as a broker-dealer with the Commission pursuant to Section 15(b) of the Exchange Act since May 1979. In February 1998, Datek Securities reorganized under a holding company, Datek Online Holdings ("DOH"), with six wholly-owned subsidiaries. As part of this corporate restructuring, Datek Securities changed its name to Datek Online Brokerage Services ("DOBS") on March 16, 1998. On March 30, 1998, Datek Securities sold the assets of its day-trading business, subject to all liabilities, to Heartland for a promissory note of $3.5 million. After the sale, DOBS conducted and continued to develop an online brokerage business. Recently, DOBS was renamed iCapital Markets ("iCapital"), which continues the firm's order-execution and proprietary-trading business, and will also provide other firms with order routing and execution services and connections to market centers. As a result of the reorganizations and name changes set forth above, iCapital succeeded to the broker-dealer registration of Datek Securities. 18. On January 24, 2002, and in connection with the SOES-based fraudulent scheme described herein, the Commission issued an Order in an administrative proceeding styled In the Matter of iCapital Markets LLC, pursuant to an Offer of Settlement submitted by iCapital, which (1) made findings that iCapital willfully violated antifraud and other provisions of the federal securities laws; (2) censured iCapital; and (3) ordered iCapital to pay a civil monetary penalty in the amount of $6.3 million. iCapital submitted its Offer of Settlement without admitting or denying the findings contained in the Commission's Order. 19. Elm Management Corporation ("Elm") is a Florida corporation wholly owned by Sheldon Maschler and Erik Maschler. As detailed below, certain defendants distributed unlawful trading profits to Elm. 20. Treasure Solutions, Inc. ("Treasure") is a Florida corporation wholly owned by Citron. As detailed below, certain defendants distributed unlawful trading profits to Treasure. FACTUAL ALLEGATIONS The SOES System 21. The National Association of Securities Dealers ("NASD") is a securities industry self-regulatory organization that is subject to Commission supervision. The NASD develops rules and regulations, conducts regulatory reviews of its members' business activities, disciplines violators, and designs, operates, and regulates securities markets for the ultimate benefit and protection of investors. NASD members agree to comply with the federal securities laws and regulations, andwith the rules of the NASD and its subsidiaries. As NASD members, Datek Securities and Heartland were subject to this agreement. 22. The Nasdaq Stock Market, Inc. ("Nasdaq") operates and maintains systems, services, and products for the Nasdaq Stock Market. The Nasdaq Stock Market is the largest electronic screen-based market in the world. Nasdaq enables securities firms to execute transactions for investors from wherever they are located by use of advanced computer and telecommunications technologies. Nasdaq is distinguished from floor-based exchanges by its use of multiple market makers, which are independent dealers who openly compete with one another for investor orders in each Nasdaq security. 23. The NASD established the Small Order Execution System ("SOES") in 1984. SOES was an automated trading system intended to benefit small investors by providing immediate execution of small orders entered into the Nasdaq system at the best available price. During the relevant period, SOES was the only Nasdaq trading system that allowed for automatic execution, and it offered faster execution than any other system. In 1988, Nasdaq made participation in SOES mandatory for all market makers in Nasdaq National Market Securities. 24. There were several restrictions on the use of the SOES system. Under NASD rules, only individual retail customers were permitted to use the SOES system, and broker-dealers were prohibited from using SOES to trade for their own accounts. NASD rules also set a maximum order size for SOES trades. The maximum order size was 500 shares in 1993, 1,000 shares in 1995, and 100 shares in 1997. NASD rules prohibited the division of orders in excess of the maximum order size into smaller parts for purposes of complying with the maximum order size requirement. 25. Broker-dealers registered to place trades on the SOES system were known as SOES Order Entry Firms. SOES Order Entry Firms were required to register with the NASD by executing an "Application and Agreement for Small Order Execution System" ("Application"). By submitting an Application, a SOES participant agreed to comply strictly with the rules governing the use of the SOES system, and was on notice that violations would subject them to censure, fine, suspension, revocation of its registration as a SOES Order Entry Firm, or any other appropriate penalty under NASD Rules. 26. Once registered as a SOES Order Entry Firm, an entity could enter the SOES system to execute trades by simply identifying itself as an Order Entry Firm. Each system entry constituted a representation by the Order Entry Firm that it was complying with all SOES rules, including the rules prohibiting proprietary trading. 27. Broker dealers could also register as a SOES Correspondent Firm, which were trading firms that submitted orders to Order Entry Firms for transmission to the SOES system. Similar to SOES Order Entry Firms, SOES Correspondent Firms also signed agreements with the NASD containing an obligation to abide by SOES rules. 28. By virtue of the SOES rules, the SOES registration process, and the terms imposed on SOES participants, the identity of the purchaser as a public customer in SOES transactions was a material fact. Defendants' Knowledge of SOES Rules 29. Datek Securities first registered as a SOES Order Entry Firm on August 4, 1987. By registering as a SOES Order Entry Firm, Datek Securities represented to the NASD and other SOES participants that they would comply with the rules governing the SOES system, including the rules prohibiting proprietary trading. 30. Heartland registered as a SOES Correspondent Firm on March 23, 1998, in anapplication signed by Elbogen. By registering as a SOES Correspondent Firm, Heartland represented to the NASD and other SOES participants that it would comply with the rules governing the SOES system, including the rules prohibiting proprietary trading. 31. Beyond those representations, certain defendants and Datek Securities were also aware of NASD rules governing SOES because of their involvement in a NASD disciplinary proceeding. In 1994, Sheldon Maschler, Citron, Elbogen, Datek Securities, and other individuals associated with Datek Securities, were the subject of an administrative complaint by the NASD for violating SOES rules between November 1991 and February 1993. The action settled on or about December 31, 1996. Pursuant to the settlement, Sheldon Maschler, Citron, Elbogen, and Datek Securities were censured and fined (Maschler $675,000; Citron $20,000; Elbogen $25,000; Datek Securities $10,000). In addition, Maschler was suspended from association with any NASD member for one year, and Citron was suspended for 20 days. 32. Citron kept abreast of proposed NASD rule changes affecting SOES. He coordinated Datek Securities' responses to such changes, and asked traders to prepare comment letters to send to the NASD and the Commission. The "Watcher" System 33. In the early 1990's, a day-trading software known as "Watcher" was developed for Datek Securities. Watcher was designed to run Nasdaq data through Datek Securities computers, which were far faster than the traditional Nasdaq Workstations II. The Watcher system gave Datek Securities traders a significant time advantage because they received last-sale and quotation-update information before other market participants. The Watcher system also analyzed the data to highlight trading opportunities. Such features enabled Datek Securities traders to react more quickly to market activity, and to have their orders executed faster than other market participants. While other means of executing securities transactions with Nasdaq market makers were available --namely, the telephone or SelectNet -- only SOES offered automatic execution, increasing the timing advantage offered by Watcher. 34. Watcher's superior technology combined with the SOES system's automatic execution to give Datek Securities traders a significant advantage. That advantage, however, was limited by SOES rules: SOES could not be used for proprietary trading and there were limits on the number of shares per trade. To maximize profitability and comply with the SOES rules, Datek Securities traders would have had to execute a large number of trades in accounts held by numerous individual retail customers. Consequently, Datek Securities would only have collected commissions on such trades. 35. Instead of using the SOES system for its intended and lawful purpose -- to place small orders for the accounts of customers -- Datek Securities and later Heartland, under the direction of defendants Sheldon Maschler, Citron, McCarty, and Erik Maschler, used the system to execute millions of unlawful proprietary trades. Those defendants recognized that they could maximize profits from Watcher by using it to trade for proprietary accounts on a massive scale using the Nasdaq system that offered the fastest execution: the SOES system. Datek Securities' Trading Operations 36. From 1993 to March 1998, Datek Securities' day-trading operation, the profit center for the entire firm, was headquartered at 50 Broad Street in Manhattan. Citron and Sheldon Maschler managed and directed Datek Securities' Manhattan office and made all significant decisions, including recruiting and hiring, employee compensation structure, and trading strategies. McCarty played a central role in the administrative operations and day-to-day oversight of the office,and by 1995 was recognized by traders and employees as the "branch manager." Erik Maschler, as head trader, directly supervised the traders. During the relevant period, Elbogen, Zelcer, and, beginning in June 1996, Erik Maschler, were identified to the public as the senior officers of Datek Securities with attendant responsibilities, including keeping accurate books and records and fulfilling reporting obligations. Nevertheless, Elbogen and Zelcer permitted Sheldon Maschler and Citron --the undisclosed control persons -- to operate the Manhattan office as they wished without proper oversight or supervision. 37. From 1994 to late 1996, Datek Securities increased the size of its day-trading operation from 20 - 30 traders to nearly 200 traders. Citron was a control person in the recruitment and hiring of traders for Datek Securities' Manhattan branch, and many of the recruits were friends and family of existing traders. Most new traders were hired directly from college, possessed little or no securities industry experience, and received no formal training once they joined Datek Securities. Rather, for a brief period of time (usually one to four weeks), they observed a more experienced trader, often Erik Maschler, who would teach them how to use Watcher. After this "training," and often before they had registered with the NASD, new traders were given $300,000 to $400,000 with which to trade, and that amount was programmed into each new trader's Watcher terminal. Based on performance, Citron or Erik Maschler could increase a trader's pre-set trading limit to $1 million or more. 38. In addition to unregistered traders, many of Datek Securities' supervisors failed to complete the NASD examinations required to act as supervisors. During 1996 and 1997, a group of experienced traders exercised undisclosed supervisory authority at Datek Securities. They trained and supervised other traders, and some attended management meetings. These supervisors also received a percentage of the trading profits earned by their trainees. 39. Datek Securities' Manhattan office was spartan. The trading floor consisted of rows of computers and folding tables. Traders watched their computer terminals and punched computer keys for hours on end, entering orders into the Watcher system. In theory, traders earned 10 to 15 percent of the trading profits they generated for Datek Securities, but in practice Datek Securities retained half of those promised profits. The Proprietary Trading Scheme at Datek Securities 40. In a scheme devised and implemented by defendants Sheldon Maschler, Citron, McCarty, and Erik Maschler, Datek Securities executed millions of unlawful proprietary trades on the SOES system. From 1995 through March 1998, Datek Securities executed approximately 12 million SOES trades, over 30 percent of all SOES trades. In placing those trades, Datek Securities falsely represented that such transactions were on behalf of public customers, in accordance with SOES rules. Defendants Sheldon Maschler, Citron, McCarty, and Erik Maschler concealed their unlawful use of the SOES system by allocating trades to nominee accounts, cross trading with Datek Securities' proprietary account, creating false books and records, and filing false reports with the Commission. 41. Later, from April 1998 through June 2001, defendants Sheldon Maschler, McCarty, and Erik Maschler continued the proprietary trading scheme at Heartland. During that time period, Heartland executed millions of proprietary SOES trades. In placing trades on the SOES system, Heartland falsely represented that those transactions were on behalf of public customers, in accordance with SOES rules. The proprietary trading scheme at Heartland was concealed from regulators using methods and procedures similar to those used at Datek Securities. 42. As described below, through defendant Raft, the aforementioned defendants funded numerous nominee accounts at Datek Securities and Heartland through which the illegal trading scheme could be conducted. By using Raft, the defendants were able to hide the funneling of illegal trading profits back into Datek Securities and Heartland. Allocation of trades to nominee accounts 43. At the direction of defendants Sheldon Maschler, Citron, McCarty, and Erik Maschler, Datek Securities used numerous nominee accounts to hide its proprietary trading. Dozens of individuals were recruited to open accounts at Datek Securities. Many of the nominees were friends and family members of Sheldon Maschler or Citron, in many cases personally solicited by Maschler or Citron to open accounts. Sheldon Maschler, Citron, McCarty, and Erik Maschler also directed the firm's employees to enlist their own friends and family members to open accounts. 44. Nominee account holders were promised quarterly payments at a fixed rate of return, typically 16 percent. In exchange, the nominee account holders gave Datek Securities complete discretionary trading authority. None of the nominee account holders directed the trading in the accounts, and very few ever had contact with the traders. 45. Using an unlawful post-trading process, defendants Sheldon Maschler, Citron, McCarty, and Erik Maschler assigned and allocated the proprietary SOES trades to the aforementioned nominee accounts. Nominee accounts never made more than the guaranteed return -- if accounts made more, McCarty and Citron ensured that Datek Securities kept the excess by adjusting commission charges and reassigning trades to other accounts. 46. The post-trading allocation of trades was possible because the SOES system did not require an Order Entry Firm to identify a particular account to enter an order. Rather, Datek Securities merely had to identify itself as an Order Entry Firm. Datek Securities traders executed SOES trades without regard to any particular account, and routinely violated the rules regarding maximum size orders. Traders did not create or fill out contemporaneous order tickets. 47. From 1993 to 1994, and at the direction of Sheldon Maschler, Citron, McCarty, and Erik Maschler, Datek Securities employees manually allocated Datek Securities' trades among accounts after the close of the market. McCarty and Erik Maschler specifically taught employees how to allocate trades, and often performed the allocation themselves. After the close of the market, Datek Securities clerks reviewed a Nasdaq print-out of the day's trades and matched the closest chronological SOES buys and sells of the same security to free up the greatest amount of "buying power," which was the amount that could be purchased in a particular account based on margin requirements and the equity in the account. After trades had been matched, the clerks gave the list to back-office employees to determine which trades would be assigned to each account. Trades were allocated to particular accounts in a manner that gave the firm's records the appearance of compliance with NASD rules governing SOES. Other factors in the allocation process included the margin requirement for the account and the rate of return guaranteed to the account. In addition, Datek Securities employees also assigned numerous profitable trades to certain favored accounts, including accounts related to Maschler, Citron, and others. 48. After the trades had been allocated, they were entered into a computer system. The resulting computer file was transferred to Datek Securities' Brooklyn office, where the information was used to generate the firm's accounting records, including blotters, trial balances, and customer account statements. The proprietary trades were unlawfully executed and falsely recorded as those of individual retail customers. Consequently, Datek Securities' books and records were false and inaccurate. 49. In certain instances, there were not enough nominee accounts to allocate all of the proprietary trades. When this occurred, a single account would be "blown out," meaning that a large number of trades would be allocated into the account, subjecting the account to a 90-day freeze under Regulation T. Citron or McCarty directed which accounts would be blown out. 50. Beginning in early 1994, the allocation process was carried out by means of a computer program developed for Datek Securities known as "Wire." Wire automated the unlawful trade allocation process and thus dramatically enhanced Datek Securities' ability to conceal its proprietary SOES trading from regulators. Datek Securities programmed Wire to allocate trades to particular accounts to achieve their guaranteed rates of return, and to give the firm's books and records the appearance of compliance with federal securities laws and NASD rules. Wire was run at the end of each trading day and, as refined by Datek Securities, at several different points during the day. By automating the allocation process, the Wire software made it more difficult for securities regulators to detect the scheme because no pre-allocation documents were generated to permit comparison. When the Wire program could not identify an account with sufficient buying power, a Datek Securities clerk would create a cross trade with the firm's proprietary account in order to create sufficient buying power. 51. Datek Securities continually made refinements to Wire that allowed the firm to conceal its unlawful proprietary trading more efficiently and effectively. By 1995, Datek Securities had developed "Real Time Wire," which, as its name suggests, allocated trades as they took place. As described below, Real Time Wire was also used by Datek Securities to assign profitable SOES trades to its proprietary account and to generate thousands of cross trades daily between its proprietary account and the nominee accounts, allowing the firm to reap enormous profits. 52. Datek Securities utilized Real Time Wire's allocation capabilities to conceal its proprietary trading from 1995 until early 1997, when it was gradually replaced by a practice referred to as "mapping," in which a specific trader was assigned to each account. By the end of 1997, each account had its own assigned trader, but Datek Securities continued to manipulate transactions and commission charges to ensure the accounts achieved the guaranteed rate of return. For example, McCarty would sometimes instruct back-office employees to swap entire days' worth of trades from one account to another as a way to achieve the guaranteed rate of return. Those practices continued at Heartland after it acquired Datek Securities' day-trading operation in March 1998. Cross trades to conceal proprietary trading 53. The Manhattan branch of Datek Securities, under the direction of Sheldon Maschler, Citron, McCarty, and Erik Maschler, also hid its unlawful trading activity by the manner in which the trades were executed. From 1995 through early 1997, Datek Securities automatically generated a series of cross trades between nominee accounts and the firm's proprietary trading account at the Manhattan branch. In a typical sequence of trades, a nominee account would purchase a Nasdaq quoted stock through SOES. The position would then be sold to the Datek Securities proprietary account at a markdown. Within minutes, or sometimes hours, the proprietary account would either sell the position through SelectNet or sell the shares back to a Datek Securities customer account (at a markup), which would then sell the position on SOES. That sequence, or its mirror image, repeated itself hundreds or sometimes thousands of times each day. Each of those cross trades occurred without input or direction from any Datek Securities trader. Even though most of the cross trades individually resulted in only a small profit for the proprietary account, the huge volume of trades flowing through the account each day generated substantial trading profits for Datek Securities. The Raft Loan Program 54. To perpetuate the proprietary trading scheme, Sheldon Maschler and Citron cycled a substantial portion of the trading profits back into Datek Securities through defendant Raft Investments, Inc. ("Raft"), a corporation controlled by Sheldon Maschler during the relevant period and by Citron through at least May 1998. Beginning in May 1997, defendants Sheldon Maschler, Citron, Erik Maschler, and entities under their control provided funds to the nominees under the guise of "loans" from Raft. With a few exceptions, Raft initially loaned each nominee $400,000. The Raft loans were unsecured. The vast majority of Raft nominees did not have sufficient income or assets to obtain or repay the loans, and would not have qualified for such an unsecured loan in an arms-length transaction with a financial institution. Moreover, Raft nominees had no reason to believe that they were obligated to repay the loans. Raft typically charged the account holders 14 percent interest on the loans, but because the nominees were generally guaranteed a 16 percent return, the nominees kept the 2 percent difference. Thus, the nominees were paid that difference for use of their identities. 55. Between May 1997 and March 1998, Raft, as funded by Sheldon Maschler, Citron, Erik Maschler, and other entities created by them, made loans totaling at least $50 million to various individuals to open approximately 125 nominee accounts at Datek Securities. Those Raft-funded nominee accounts were then used by Datek Securities and later Heartland, under the direction of Sheldon Maschler, Citron, McCarty, and Erik Maschler, to conceal their unlawful proprietary SOES scheme. The funding and use of nominee accounts in such a manner made Datek Securities and Heartland the beneficial owners of those accounts, but neither Datek Securities nor Heartland recorded such beneficial ownership accurately in their books and records. 56. McCarty administered the Raft loan program under the direction of Sheldon Maschler and Citron. McCarty provided the paperwork to nominees, maintained the Raft checkbook in his office, and generally handled the ongoing administrative details for the Raft account holders. Initially, Raft nominees were sent checks every quarter, along with instructions -- usually from McCarty -- that they were to forward the specified interest portion back to Raft. Later on, the interest was wired directly to Raft and a separate check was issued to the nominee account holder. Sheldon Maschler, Citron, McCarty, and Erik Maschler knew the Raft "loans" were part of the scheme to profit from and perpetuate the unlawful proprietary trading. 57. McCarty closely monitored each nominee account's rate of return on a spreadsheet, and ensured that each achieved its guaranteed rate of return by allocating profitable trades to under-performing accounts and by manipulating commission rates. Distribution of Profits to Sheldon Maschler and Citron 58. The fraudulent scheme to engage in unlawful proprietary trading resulted in substantial profits. These profits were paid to entities controlled by Sheldon Maschler, Citron, and others. 59. In 1987, Elbogen entered into an oral agreement with Sheldon Maschler whereby Maschler received 90 percent of the profits generated by Datek Securities' day-trading operation. Defendants Sheldon Maschler, Citron, and McCarty sought to conceal this agreement. 60. Defendants Citron, McCarty, and Erik Maschler also received unlawful profits, directly and indirectly, from the Sheldon Maschler profit pool. 61. In 1995, Datek Securities paid Elm Management Corporation ("Elm"), a company wholly owned by Sheldon Maschler and Erik Maschler, approximately $60 million. In 1996, DatekSecurities paid Elm approximately $127 million; Elm in turn paid approximately 40 percent of those funds to Treasure Solutions (Treasure"), a company wholly owned by Citron. Datek Securities also paid $14 million directly to Treasure in 1996. Between 1997 and March 1998, Datek Securities paid approximately $76 million to SmithWall Associates, LLC ("SmithWall"), a limited liability company owned and controlled by Citron, trusts for the benefit of Erik Maschler and two of Maschler's other children, and others. 62. McCarty calculated the amounts of the Elm and Treasure payments, and either Elbogen or Zelcer signed the checks. McCarty, Elbogen, and Zelcer knew or should have known that the payments were distributions of trading profits, but participated in the effort to hide this fact. 63. In 1995 and 1996, Datek Securities falsely classified the Elm and Treasure payments in its books and records. Initially, Datek Securities classified the payments in its general ledger as "commission expenses." In December 1996, Elbogen instructed Zelcer to reclassify the 1996 Elm and Treasure payments in its general ledger as "data processing" expenses. When Zelcer raised concerns that the 1996 reclassification would invite regulatory scrutiny, Elbogen rejected the concerns and instructed Zelcer to make the reclassification. Despite a duty to ensure accuracy of Datek Securities' books and records, Zelcer did nothing further to investigate the Elm payments. In addition, Datek Securities did not reclassify the 1995 Elm and Treasure payments in its general ledger. 64. In 1995, 1996, and 1997, Datek Securities also falsely classified the Elm and Treasure payments in reports filed with the Commission. Datek Securities' 1995 FOCUS filings, which were prepared by Zelcer, and its 1995 audited financial statements, which were signed by Zelcer, classified the Elm and Treasure payments as "salary and commission" expenses. The firm's 1996 audited financial statements, which were signed by Zelcer, classified the payments to Elm and Treasure as "computer services" expenses. Datek Securities' FOCUS report for the fourth quarter of 1996, which was prepared by Zelcer, also reflected that change in classification. The firm's 1997 audited financial statements, which were signed by Erik Maschler and Elbogen, classified the Elm payments as "computer services" expenses. 65. At the time that Zelcer falsely recorded and reclassified the Elm payments at Elbogen's instruction, no contemporaneous invoices or contracts existed to support the payments. In mid-1997, when the Commission staff requested documentation supporting the 1995 and 1996 payments, Sheldon Maschler, Citron, McCarty, and others at Datek Securities prepared and back-dated sets of agreements, contracts, and invoices between Datek Securities and Elm, between Datek Securities and Treasure, and between Elm and Treasure. At McCarty's direction, Zelcer produced the fictitious documents to the Commission. Failure to Disclose Control Persons 66. Defendants and Datek Securities concealed and failed to disclose to the Commission that Maschler and Citron were control persons of Datek Securities. Defendants and Datek Securities failed to disclose this fact in Datek Securities' Forms BD filed with the Commission between 1995 and 1997, and failed to file amendments to the Forms BD to correct the inaccurate information. The Forms BD filed with the Commission were signed by either Elbogen or Zelcer, both of whom knew that Maschler and Citron were control persons of Datek Securities. Maschler continued to control Datek Securities during his NASD suspension in 1997. 67. Between late 1995 and early 1997, Defendants caused Datek Securities to file at least eight Forms BD with the Commission that failed to disclose that Maschler and Citron controlled Datek Securities. Citron and Maschler were never listed as control persons on any portion of theForms BD that required such information. Citron was never identified in Schedule A to any of Datek Securities' Forms BD filed during this period. Maschler was listed as a shareholder several times, but there was always a "no" next to his name under the column headed "control person." Moreover, on at least eight occasions between late 1995 and early 1997, Datek Securities responded "no" to Question 6.A. of the Forms BD, another part of the Form BD requiring identification of additional control persons. Continuation of Proprietary Trading Scheme at Heartland 68. From April 1998 through June 2001, defendants Sheldon Maschler, McCarty, and Erik Maschler continued to carry out the fraudulent SOES trading scheme while in control of Heartland, which purchased Datek Securities' day-trading business on March 30, 1998, in exchange for a promissory note of $3.5 million. Erik Maschler and McCarty executed the sales agreement on behalf of Heartland and Datek Securities, respectively. Pursuant to the terms of the sales agreement, Heartland acquired those assets subject to liabilities relating to the day-trading business. 69. Heartland's trading practices were virtually identical to Datek Securities' former day-trading operation; the only operational difference was in name. Heartland traders continued to use the Watcher System, licencing the software from a subsidiary of Datek Online Holdings ("DOH"). Sheldon Maschler continued to exert undisclosed control over the operations and management of Heartland, just as he had at Datek Securities. Initially, Heartland was wholly owned by defendants Erik Maschler and Elbogen, but in late 1999, Elbogen sold a significant portion of his interest in the firm to two of Sheldon Maschler's other sons and McCarty. During the relevant period, McCarty was Heartland's president and chief financial officer, while Erik Maschler was Heartland's chief executive officer and a vice president of the firm, with responsibility for supervising the traders. 70. The unlawful SOES trading practices at Datek Securities continued unabated at Heartland. From April 1998 through June 2001, Heartland unlawfully executed millions of trades on the SOES system. Almost all of the trading profits were paid out to Raft as interest or to Erik Maschler, McCarty, and Elbogen as salary and dividends. 71. The methods used to conceal the unlawful SOES trading at Datek Securities (allocation of trades to Raft-funded nominee accounts; manipulation of profits and losses; creation of false books and records; filing of false reports with the Commission) also continued virtually unabated at Heartland. All but five of the Raft nominee accounts transferred from Datek Securities to Heartland. As of January 1, 1999, Raft had approximately 138 loans outstanding to nominees whose accounts were maintained at Heartland. The loan amounts ranged from $200,000 to $700,000 and totaled $39.33 million. In addition, Raft made at least 11 loans to new nominees at Heartland during 1999 for a total of $3.77 million. The Savings and Loan Conversion Scheme 72. The second fraudulent scheme in many ways paralleled the proprietary SOES trading scheme, and involved the conduct of defendants Sheldon Maschler, Michael McCarty, Raft, and JES in connection with the initial public offerings of three savings and loan associations. Maschler and McCarty had Raft and JES extend sham loans to obtain the identities of depositors who held subscription rights to purchase shares in the initial public offerings of the three banks. In many instances the depositors receiving the "loans" had insufficient assets to qualify for the amount of the loans. As a result of these arrangements, Maschler and McCarty were able to obtain the subscription rights of at least 60 nominees, which they then used to purchase shares in the banks' initial public offerings. After the banks went public, the shares acquired were sold through accounts controlled by Maschler and McCarty for an illegal profit of $1,788,472. 73. Savings and loan associations are either mutual associations ("mutual banks") owned by their borrowers and account holders, or stock associations ("stock banks") owned by their shareholders. Either type may be federally chartered or state chartered. Mutual banks may convert to stock banks by issuing and selling shares of stock to the public. Federal and state banking regulators have developed detailed rules to ensure that these conversions will benefit the converting association, its account holders, and the general public. Specifically, rules promulgated by the Office of Thrift Supervision, the primary regulator of federally-chartered savings and loan associations, require mutual banks converting to stock ownership to offer stock to their account holders ahead of the general public, and prohibit account holders from transferring their conversion subscription rights or the underlying securities to another person. Similarly, the State of New York Banking Department has adopted similar provisions for state-chartered savings and loan associations chartered in the state of New York. As such, the identity of purchasers in mutual bank conversions is a material fact. 74. Staten Island Savings Bank ("SISB") was a federally-chartered mutual association owned by its borrowers and account holders. In 1997, SISB converted to a stock association by means of a sale of shares to the public through Staten Island Bancorp ("SIB"), a bank holding company formed to effect the conversion. 75. Richmond County Savings Bank ("RCSB") was a New York state-chartered mutual association owned by its borrowers and account holders. In 1998, RCSB converted to a stock association by means of a sale of shares to the public through Richmond County Financial Corporation ("RCFC"), a bank holding company formed to effect the conversion. 76. Independence Savings Bank ("ISB") was a New York state-chartered mutual association owned by its borrowers and account holders. In 1998, ISB converted to a stock association by means of a sale of shares to the public through Independence Community Bank Corporation ("ICBC"), a bank holding company formed to effect the conversion. 77. At all relevant times, SISB, RCSB, and ISB were subject to federal or state laws and regulations regarding mutual bank conversions. SIB's initial public offering 78. In September 1997, SISB provided its account holders with stock order forms in connection with its plan to convert to a stock association. The plan offered account holders stock in SIB at $10 per share. In November 1997, the offering price was increased to $12 per share. Account holders wishing to purchase shares were instructed to complete and sign a stock order form, submit payment for the shares, and, consistent with applicable regulations, certify that the order was for their own accounts and that no agreement or understanding existed regarding any further sale or transfer of shares. 79. Sheldon Maschler, through his wholly-owned company JES, unlawfully entered into arrangements with several SISB account holders to use their identities and subscription rights to purchase shares in the SIB stock offering. Maschler was aided in this endeavor by others, including McCarty. 80. Following the terms of each agreement, funds provided or "loaned" by JES were used to purchase SIB stock. Thereafter, the acquired stock was delivered into accounts at Datek Securities opened in the account holders' names. McCarty and others facilitated the paperwork for the transactions. In this manner, Maschler and McCarty gained control over the shares purchased and all proceeds resulting from the disposition of the shares. After the stock was sold, JES received back the funds used to purchase the shares plus a percentage of the profits (typically 90 percent); the remaining profits were paid to the account holders. 81. In total, Maschler, through JES, purchased 44,167 shares of SIB stock at $12 per share using the SISB account holders' subscription rights, at a total cost of $530,000. Maschler and McCarty caused the submission of SIB subscription forms that failed to disclose JES as the true purchaser. Had SISB known that the true purchaser was ineligible, it would not have honored the account holders' subscription rights. 82. From about December 22 through December 26, 1997, all of the stock obtained through the SISB account holders' subscription rights was sold in the accounts at Datek Securities. The stock sold at an average price of $19.63 per share, for a net profit of $337,002 after commissions. Pursuant to the agreements with the account holders, JES received 90 percent of the profits and return of the funds advanced for purchase of the shares. RCFC's and ICBC's initial public offerings 83. In December 1997, RCSB and ISB, both New York state-chartered banks, mailed their account holders information regarding their plans to convert to stock associations under their respective holding companies, RCFC and ICBC. Account holders wishing to purchase shares were instructed to complete and sign a stock order form, submit payment for the shares, and, consistent with applicable New York regulations, certify that the order was for their own accounts and that no agreement or understanding existed regarding any further sale or transfer of shares. Shares in RCFC and ICBC were initially offered at $10 per share. 84. Using Raft and JES, Sheldon Maschler and others acting on his behalf, including McCarty, unlawfully entered into arrangements with at least 57 RCSB and ISB account holders to use their subscription rights to purchase shares in the RCFC and ICBC stock offerings. Many of those account holders had limited investment experience, and several of them lacked sufficient funds to purchase any conversion stock. McCarty met personally with several prospective subscribers and assured them the arrangements were legal. Following the terms of each agreement, funds provided or "loaned" by JES or Raft were used to purchase the stock. Thereafter, the acquired stock was delivered into accounts at King Financial opened in the account holders' names. In this manner, Maschler and McCarty gained control over the shares purchased and all proceeds resulting from the disposition of the shares. After the stock was sold, JES or Raft received back the funds used to purchase the shares plus a percentage of the profits (typically 90 percent); the remaining profits were paid to the account holders. McCarty and others facilitated the paperwork for the transactions. 85. In total, Maschler's entities purchased at least 125,723 shares of RCFC stock at a total cost of $1,257,230, and 96,782 shares of ICBC stock at a total cost of $967,820. Maschler personally directed certified checks to be issued for this purpose, and Maschler and McCarty caused the submission of RCFC and ICBC subscription forms that failed to disclose JES or Raft as the true purchasers. Had RCFC and ICBC known that the true purchasers were ineligible, they would not have honored the account holders' subscription rights. 86. On February 18, 1998, RCFC went public and the stock opened at $16.50 per share. On February 23, 1998, the stock in the King Financial accounts was sold at an average price of $16.28 per share, for a net profit of approximately $790,000 after commissions. 87. On March 17, 1998, ICBC went public and the stock opened at $17.13 per share. On March 20, 1998, the stock in the King Financial accounts was sold at an average price of $16.83 per share, for a net profit of approximately $661,077 after commissions. 88. Pursuant to the agreements with the account holders, the Maschler entities received the agreed percentage of the profits on the accounts' conversions, plus return of the funds advanced for purchase of the shares. McCarty facilitated the transfer of the profits to the Maschler entities. 89. Both the RCSB and ISB conversion offerings were oversubscribed, and the banks issued refund checks to those subscribers whose orders could not be completely filled. For those subscribers who had arrangements with Maschler's entities, the refund checks were deposited directly into the newly-established accounts at King Financial. The account holders never received or saw the refund checks, which ultimately were diverted to the Maschler entities. FIRST CLAIM FOR RELIEF
90. Paragraphs 1 through 89 are hereby realleged and incorporated by reference. 91. As detailed above, Datek Securities and defendants Sheldon Maschler, Citron, McCarty, Erik Maschler, and Heartland devised and implemented a fraudulent scheme to gain access to and use the SOES system for unlawful proprietary trading. Datek Securities and Citron engaged in this fraudulent scheme from at least 1993 to March 1998. Sheldon Maschler, McCarty, and Erik Maschler engaged in this fraudulent scheme from at least 1993 through June 2001. Heartland engaged in this fraudulent scheme from April 1998 through June 2001. 92. Datek Securities and defendants Sheldon Maschler, Citron, McCarty, Erik Maschler, and Heartland, by engaging in the conduct described above, directly or indirectly, by use of the means or instruments of transportation or communication in interstate commerce, or by use of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of securities: (1) employed devices, schemes, or artifices to defraud, (2) made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) engaged in acts, practices, or courses of business which operate or would operate as a fraud or deceit upon any person. 93. By reason of the foregoing, Datek Securities and defendants Sheldon Maschler, Citron, McCarty, Erik Maschler, and Heartland violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder [15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5]. Unless restrained and enjoined, defendants will continue to violate those provisions. 94. Sheldon Maschler, Citron, McCarty, and Erik Maschler are also liable for Datek Securities' violations as control persons of Datek Securities pursuant to Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)]. Sheldon Maschler, McCarty, and Erik Maschler are also liable for Heartland's violations as control persons of Heartland pursuant to Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)]. 95. Raft aided and abetted violations by Datek Securities and defendants Sheldon Maschler, Citron, McCarty, and Erik Maschler of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder [15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5]. SECOND CLAIM FOR RELIEF
96. Paragraphs 1 through 95 are hereby realleged and incorporated by reference. 97. As detailed above, defendants Sheldon Maschler and McCarty engaged in a fraudulent scheme relating to the stock conversions of three savings and loan institutions. Federal and state laws and regulations made it unlawful for anyone other than account holders to subscribe for and purchase stock in the institutions' stock offerings. Defendants Sheldon Maschler and McCarty engaged in securities fraud by purchasing the subscription rights of account holders and misrepresenting to the institutions that the account holders were purchasing stock when, in fact, the Maschler entities were the actual purchasers. Had the institutions known the true identity of the purchasers, they would not have sold the stock. 98. Defendants Sheldon Maschler and McCarty, by engaging in the conduct described above, directly or indirectly, by use of the means or instruments of transportation or communication in interstate commerce, or by use of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of securities: (1) employed devices, schemes, or artifices to defraud, (2) made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) engaged in acts, practices, or courses of business which operate or would operate as a fraud or deceit upon any person. 99. By reason of the foregoing, defendants Sheldon Maschler and McCarty violated, and unless restrained and enjoined will continue to violate, Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder [15 U.S.C. § 78j(b) and 17 C.F.R. §240.10b-5]. 100. Defendants Raft and JES aided and abetted Maschler's and McCarty's violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder [15 U.S.C. § 78j(b) and 17 C.F.R. §240.10b-5]. THIRD CLAIM FOR RELIEF
101. Paragraphs 1 through 100 are hereby realleged and incorporated by reference. 102. Defendants Sheldon Maschler, Citron, McCarty, Erik Maschler, and Heartland, by engaging in the conduct described above relating to unlawful proprietary trading on the SOES system, directly or indirectly, in connection with the offer or sale of securities, by the use of the means or instruments of transportation or communication in interstate commerce or by the use of the mails: (1) employed devices, schemes, or artifices to defraud, (2) obtained money or property by means of untrue statements of material facts or omissions to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (3) engaged in acts, practices, or courses of business which operate or would operate as a fraud or deceit upon the purchasers of such securities. 103. By reason of the foregoing, defendants Sheldon Maschler, Citron, McCarty, Erik Maschler, and Heartland, directly or indirectly, violated, and unless restrained and enjoined will continue to violate, Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)]. 104. Sheldon Maschler, Citron, McCarty, and Erik Maschler are also liable for Datek Securities' violations as control persons of Datek Securities pursuant to Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)]. Sheldon Maschler, McCarty, and Erik Maschler are also liable for Heartland's violations as control persons of Heartland pursuant to Section 20(a) of the Exchange Act [15 U.S.C. § 78t(a)]. 105. Raft aided and abetted the violations by Datek Securities and defendants Sheldon Maschler, Citron, McCarty, and Erik Maschler of Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)]. FOURTH CLAIM FOR RELIEF
106. Paragraphs 1 through 105 are hereby realleged and incorporated by reference. 107. As set forth above, Heartland devised and implemented a fraudulent scheme to gain access to and use the SOES system for unlawful proprietary trading from April 1998 through June 2001. 108. Heartland, by engaging by engaging in the conduct described above, directly or indirectly, by use of the means or instrumentality of transportation or communication in interstate commerce, or by use of the mails, or of any facility of any national securities exchange, in connection with the purchase or sale of securities: (1) employed manipulative, deceptive, or other fraudulent devices or contrivances, (2) made untrue statements of material facts or omitted to state material facts necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, which statements or omissions were made with knowledge or reasonable grounds to believe that they were untrue or misleading, or (3) engaged in acts, practices, or courses of business which operate or would operate as a fraud or deceit upon any person. 109. By reason of the foregoing, Heartland, directly or indirectly, violated, and unless restrained and enjoined will continue to violate, Section 15(c) of the Exchange Act and Rule 15c1-2 promulgated thereunder [15 U.S.C. § 78o(c) and 17 C.F.R. § 240.15c1-2]. FIFTH CLAIM FOR RELIEF
110. Paragraphs 1 through 109 are hereby realleged and incorporated by reference. 111. As set forth above, Datek Securities and Heartland failed to make and keep certain books and records current and accurate. Datek Securities and Heartland, among other things, falsely recorded in its blotters, ledgers, ledger accounts, and other records, including records of original entry, that its proprietary trades were customer transactions conducted in non-proprietary customer accounts. 112. As a result, Datek Securities and Heartland violated Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(1), 17a-3(a)(2), and 17a-3(a)(3) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. §§ 240.17a-3(a)(1), 240.17a-3(a)(2), and 240.17a-3(a)(3)]. 113. Defendants Sheldon Maschler, Citron, McCarty, Erik Maschler, Elbogen, and Zelcer knowingly aided and abetted Datek Securities' violations of Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(1), 17a-3(a)(2), and 17a-3(a)(3) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. §§ 240.17a-3(a)(1), 240.17a-3(a)(2), and 240.17a-3(a)(3)]. 114. Defendants Sheldon Maschler, McCarty, and Erik Maschler knowingly aided and abetted Heartland's violations of Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(1), 17a-3(a)(2), and 17a-3(a)(3) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. §§ 240.17a-3(a)(1), 240.17a-3(a)(2), and 240.17a-3(a)(3)]. SIXTH CLAIM FOR RELIEF
115. Paragraphs 1 through 114 are hereby realleged and incorporated by reference. 116. As set forth above, Datek Securities failed to make and keep accurate records of each purchase and sale of securities, including order and sales tickets prepared prior to the execution of trading transactions. 117. As a result, Datek Securities violated Section 17(a)(1) of the Exchange Act and Rule 17a-3(a)(7) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. § 240.17a-3(a)(7)]. 118. Defendants Sheldon Maschler, Citron, McCarty, and Erik Maschler aided and abetted Datek Securities' violations of Section 17(a)(1) of the Exchange Act and Rule 17a-3(a)(7) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. § 240.17a-3(a)(7)]. SEVENTH CLAIM FOR RELIEF
119. Paragraphs 1 through 118 are hereby realleged and incorporated by reference. 120. As set forth above, in 1995 and 1996 Datek Securities falsely classified in its ledgers the payments it made to Elm and Treasure. Datek Securities also falsely classified the Elm and Treasure payments in its FOCUS reports and in its audited financial statements submitted to the Commission for the years 1995 and 1996. 121. As a result, Datek Securities violated Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(2), 17a-5(a), and 17a-5(d) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. §§ 240.17a-3(a)(2), 240.17a-5(a), and 240.17a-5(d)]. 122. Defendants Sheldon Maschler, Citron, McCarty, Elbogen, Erik Maschler, and Zelcer aided and abetted Datek Securities' violations of Section 17(a)(1) of the Exchange Act and Rule 17a-3(a)(2) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. § 240.17a-3(a)(2)]. 123. Defendants Zelcer and Elbogen aided and abetted Datek Securities' violations of Section 17(a)(1) of the Exchange Act and Rules 17a-3(a)(2), 17a-5(a), and 17a-5(d) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. §§ 240.17a-3(a)(2), 240.17a-5(a), and 240.17a-5(d)]. EIGHTH CLAIM FOR RELIEF
124. Paragraphs 1 through 123 are hereby realleged and incorporated by reference. 125. As set forth above, false data regarding Datek Securities' trading was used to create false books and records. This data affected the sources of information used to prepare Datek Securities' FOCUS filings and annual audited financial statements for 1995, 1996, and 1997, and made these reports inaccurate. 126. False data regarding Heartland's trading was also used to create false books and records. This data affected the sources of information used to prepare Heartland's FOCUS filings and annual audited financial statements for 1998 through 2000, and made these reports inaccurate. 127. As a result, Datek Securities and Heartland violated Section 17(a)(1) of the Exchange Act and Rules 17a-5(a) and 17a-5(d) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. §§ 240.17a-5(a) and 240.17a-5(d)]. 128. Defendants Zelcer and Elbogen aided and abetted Datek Securities' violations of Section 17(a)(1) of the Exchange Act and Rules 17a-5(a) and 17a-5(d) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. §§ 240.17a-5(a) and 240.17a-5(d)]. 129. Defendant Erik Maschler aided and abetted Heartland's violations of Section 17(a)(1) of the Exchange Act and Rule 17a-5(d) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. § 240.17a-5(d)]. NINTH CLAIM FOR RELIEF
130. Paragraphs 1 through 129 are hereby realleged and incorporated by reference. 131. As set forth above, Datek Securities and Heartland failed to reflect in its books and records the true beneficial owners of the nominee accounts funded by Raft loans. 132. As a result, Heartland violated Section 17(a)(1) of the Exchange Act and Rule 17a-3(a)(9) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. § 240.17a-3(a)(9)]. 133. Defendants Sheldon Maschler, Citron, and McCarty aided and abetted Datek Securities' violations of Section 17(a)(1) of the Exchange Act and Rule 17a-3(a)(9) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. § 240.17a-3(a)(9)]. 134. Defendants Sheldon Maschler, Erik Maschler, and McCarty aided and abetted Heartland's violations of Section 17(a)(1) of the Exchange Act and Rule 17a-3(a)(9) promulgated thereunder[15 U.S.C. § 78q(a)(1) and 17 C.F.R. § 240.17a-3(a)(9)]. TENTH CLAIM FOR RELIEF
135. Paragraphs 1 through 134 are hereby realleged and incorporated by reference. 136. As set forth above, Datek Securities permitted unregistered employees to buy and sell securities. 137. As a result of the conduct set forth above, Datek Securities willfully violated Section 15(b) of the Exchange Act and Rule 15b7-1 promulgated thereunder [15 U.S.C. § 78o(b) and 17 C.F.R. § 240.15b7-1]. 138. Defendants Sheldon Maschler, Erik Maschler, Citron, and McCarty aided and abetted Datek Securities' violations of Section 15(b) of the Exchange Act and Rule 15b7-1 promulgated thereunder [15 U.S.C. § 78o(b) and 17 C.F.R. § 240.15b7-1]. ELEVENTH CLAIM FOR RELIEF
139. Paragraphs 1 through 138 are hereby realleged and incorporated by reference. 140. As set forth above, Datek Securities used unregistered employees to buy and sell securities and failed to make and keep required documentation, including a Form U-4 for each such employee, that reflected current and accurate registration information. 141. As a result, Datek Securities violated Section 17(a)(1) of the Exchange Act and Rule 17a-3(a)(12) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. § 240.17a-3(a)(12)]. 142. Defendants Sheldon Maschler, Citron, and McCarty aided and abetted Datek Securities' violations of Section 17(a)(1) of the Exchange Act and Rule 17a-3(a)(12) promulgated thereunder [15 U.S.C. § 78q(a)(1) and 17 C.F.R. § 240.17a-3(a)(12)] . TWELFTH CLAIM FOR RELIEF
143. Paragraphs 1 through 142 are hereby realleged and incorporated by reference. 144. As set forth above, Datek Securities failed to disclose to the SEC, as required, that Sheldon Maschler and Citron exercised control, directly or indirectly, over Datek Securities' management and policies, through agreement or otherwise. 145. As a result, defendants Sheldon Maschler, Citron, McCarty, Elbogen, and Zelcer aided and abetted the violations by Datek Securities of Section 15(b) of the Exchange Act and Rule 15b3-1 promulgated thereunder [15 U.S.C. § 78o(b) and 17 C.F.R. § 240.15b3-1]. PRAYER FOR RELIEF WHEREFORE, Plaintiff Securities and Exchange Commission respectfully requests that this Court enter a judgment: (i) permanently enjoining defendants Sheldon Maschler, Citron, and McCarty from violating Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)] and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder [15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5], and from aiding and abetting violations of Sections 15(b) and 17(a)(1) of the Exchange Act and Rules 15b3-1, 15b7-1, 17a-3(a)(1), 17a-3(a)(2), 17a-3(a)(3), 17a-3(a)(7), 17a-3(a)(9), and 17a-3(a)(12) promulgated thereunder [15 U.S.C. §§ 78o(b), 78q(a)(1) and 17 C.F.R. §§ 240.15b3-1, 240.15b7-1, 240.17a-3(a)(1), 240.17a-3(a)(2), 240.17a-3(a)(3), 240.17a-3(a)(7), 240.17a-3(a)(9), and 240.17a-3(a)(12)]; (ii) permanently enjoining defendant Heartland from violating Section 17(a)(1) of the Exchange Act [15 U.S.C. § 78q(a)(1)], and Sections 10(b), 15(c), and 17(a)(1) of the Exchange Act and Rules 10b-5, 15c1-2, 17a-3(a)(1), 17a-3(a)(2), 17a-3(a)(3), 17a-3(9), 17a-5(a), and 17a-5(d) promulgated thereunder [15 U.S.C. §§ 78j(b), 78o(c), 78q(a)(1) and 17 C.F.R. §§ 240.10b-5, 240.15c1-2, 240.17a-3(a)(1), 240.17a-3(a)(2), 240.17a-3(a)(3), 240.17a-3(a)(9), 240.17a-5(a), and 240.17a-5(d)]; (iii) permanently enjoining defendant Erik Maschler from violating Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)] and Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder [15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5], and from aiding and abetting violations of Sections 15(b) and 17(a)(1) of the Exchange Act and Rules 15b7-1, 17a-3(a)(1), 17a-3(a)(2), 17a-3(a)(3), 17a-3(a)(7), 17a-3(a)(9), and 17a-5(d) promulgated thereunder [15 U.S.C. §§78o(b), 78q(a)(1) and 17 C.F.R. §§ 240.15b7-1, 240.17a-3(a)(1), 240.17a-3(a)(2), 240.17a-3(a)(3), 240.17a-3(a)(7), 240.17a-3(a)(9), and 240.17a-5(d)]; (iv) permanently enjoining defendants Elbogen and Zelcer from aiding and abetting violations of Sections 15(b) and 17(a)(1) of the Exchange Act and Rules 17a-3(a)(1), 17a-3(a)(2), 17a-3(a)(3), 17a-5(a), and 17a-5(d) promulgated thereunder [15 U.S.C. §§ 78o(b) and 78q(a)(1) and 17 C.F.R. §§ 240.15b3-1, 240.17a-3(a)(1), 240.17a-3(a)(2), 240.17a-3(a)(3), 240.17a-5(a), and 240.17a-5(d)]; (v) permanently enjoining defendant Raft Investments, Inc. from aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder [15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5]; (vi) permanently enjoining defendant JES Management Corp. from aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder [15 U.S.C. § 78j(b) and 17 C.F.R. § 240.10b-5]; (vii) ordering defendants Sheldon Maschler, Citron, McCarty, Heartland, Erik Maschler, Elbogen, Zelcer, Raft Investments, Inc., and JES Management Corp. to pay civil monetary penalties pursuant to Section 21(d)(3) of the Exchange Act [15 U.S.C. § 78u(d)(3)]; (viii) ordering defendants Sheldon Maschler, Citron, McCarty, Heartland, Erik Maschler, and Raft Investments, Inc. to pay civil monetary penalties pursuant Section 20(d) of the Securities Act [15 U.S.C. § 77t(d)]; and (ix) granting such other relief as this Court may deem just and appropriate. Respectfully submitted, ______________________________
Of Counsel:
Dated: January __, 2003
http://www.sec.gov/litigation/complaints/comp17929.htm
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