SEC Charges Former Day-Trading Principals with Securities Fraud; Others Charged with Fraud or Violating Recordkeeping and Reporting Rules
FOR IMMEDIATE RELEASE
Defendants Agree to Pay Total of $70 Million
Washington, D.C., January 14, 2003 -- The Securities and Exchange Commission today charged Sheldon Maschler, Jeffrey A. Citron, Michael McCarty, Erik Maschler, and Heartland Securities Corp. with participating in an extensive fraudulent scheme involving the Nasdaq Stock Market's Small Order Execution System (SOES) from 1993 to June 2001. These defendants and others have agreed to pay over $70 million in penalties and disgorgement to settle the matter. Of the total penalties, Sheldon Maschler will pay approximately $29.2 million and Citron will pay approximately $22.5 million — among the largest penalty amounts the SEC has ever obtained from individuals.
In a complaint filed in U.S. District Court for the Southern District of New York, the SEC charged Sheldon Maschler, 58, Citron, 32, McCarty, 39, and Erik Maschler, 32, with securities fraud and violations of the Commission's broker-dealer books and records and reporting provisions. Sheldon Maschler, Citron, McCarty, and Erik Maschler devised and orchestrated the unlawful SOES trading scheme at the former Datek Securities Corp. from 1993 to March 1998. Maschler, McCarty, and Erik Maschler continued the scheme from April 1998 through June 2001 while in control of Heartland, which had purchased Datek Securities' day-trading business in March 1998.
"Today's action and hard-hitting penalties reinforce the high degree of integrity required of broker-dealers and persons associated with them," said Antonia Chion, Associate Director of Enforcement at the SEC.
Until mid-2001, 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. According to the complaint, Sheldon Maschler, Citron, McCarty, and Erik Maschler accessed the SOES system to execute millions of unlawful proprietary trades, generating tens of millions of dollars in illegal profits. These defendants hid their fraudulent use of the SOES system from regulators by allocating proprietary trades to dozens of nominee customer accounts, creating fictitious books and records, and filing false reports with the SEC.
The SEC's complaint also charged Sheldon Maschler and McCarty in connection with a separate, yet similar, fraudulent scheme involving the conversion of three New York savings and loan institutions from mutual ownership to stock ownership. In violation of federal and state banking regulations, Maschler and McCarty entered into agreements with numerous depositors to obtain their subscription rights and then fraudulently used those rights to purchase shares of the banks' initial public offerings. Maschler and McCarty later sold the conversion stock on the open market, realizing illegal profits of $1,788,472. Defendants Raft Investments Inc. and JES Management Corp., a corporation owned by Sheldon Maschler, aided and abetted the bank conversion scheme by providing the funds used to obtain the depositors' subscription rights.
The SEC's Complaint
The SEC's federal court complaint includes the following allegations:
- The SOES system, established by the NASD in 1984, was an automated trading system designed to benefit small investors by providing automatic execution of small Nasdaq orders at the best available price.
- From at least 1993 to March 1998, defendants Sheldon Maschler, Citron, McCarty, and Erik Maschler controlled Datek Securities through its Manhattan branch, then a day-trading operation that was the profit center for the entire firm. The firm used a day-trading software known as "Watcher," the speed and features of which enabled its traders to react quickly to market activity. Although there were other means of executing securities transactions with Nasdaq market makers, only SOES offered automatic execution, thereby increasing the timing advantage offered by Watcher.
- Instead of using SOES for its lawful purpose — to execute trades on behalf of individual investors — defendants Sheldon Maschler, Citron, McCarty, and Erik Maschler engaged in a massive fraudulent scheme to execute millions of proprietary trades on the SOES system.
- To hide their proprietary trading, defendants Sheldon Maschler, Citron, McCarty, and Erik Maschler established dozens of nominee accounts, and paid nominees a guaranteed and fixed rate of return in exchange for the use of their identities and complete discretionary trading authority.
- From 1993 to 1994, 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. Beginning in early 1994, the unlawful allocation process was automated and carried out through a sophisticated software program developed for the firm and known as "Wire." Wire dramatically enhanced defendants' ability to conceal their proprietary SOES trading. The software was ultimately refined to allocate trades among nominee customer accounts as the trades occurred.
- Beginning in 1997, Sheldon Maschler and Citron began funding nominee accounts with profits generated from the SOES scheme. Defendant Raft Investments Inc., a corporation then controlled by Sheldon Maschler and Citron, provided at least $50 million to fund more than 125 nominee accounts at Datek Securities.
- The unlawful proprietary trading scheme resulted in substantial profits, the majority of which were paid to Sheldon Maschler and Citron. Defendants Aaron Elbogen, 54, then Datek Securities' chief executive officer, and Moishe Zelcer, 56, the firm's former chief compliance officer and financial operations principal, aided and abetted certain books and records and reporting violations by falsely classifying payments of the firm's trading profits to entities controlled by Sheldon Maschler and Citron, and by failing to disclose that Sheldon Maschler and Citron were control persons of the firm.
- On March 30, 1998, Datek Securities sold its day-trading operations to Heartland, a registered broker-dealer then owned by Erik Maschler and Elbogen. Sheldon Maschler, McCarty, and Erik Maschler controlled Heartland, and continued the unlawful SOES trading scheme from April 1998 through June 2001. Nearly all of the nominee accounts at Datek Securities were transferred to Heartland, and the methods used to conceal the scheme continued unabated.
Defendants have agreed to settle this matter without admitting or denying the allegations in the complaint. The settlement terms are subject to court approval.
Sheldon Maschler, Citron, McCarty, Erik Maschler, and Heartland have consented to final judgments permanently enjoining each from violating the antifraud provisions of the federal securities laws: Section 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 (Exchange Act) and Rule 10b-5 thereunder. They have also agreed to be enjoined from aiding and abetting violations of certain broker-dealer books and records and reporting provisions of the Exchange Act. In addition, Sheldon Maschler has agreed to pay $29,201,808, Citron $22,462,929, Heartland $7,000,000, McCarty $1,497,529, and Erik Maschler $5,990,114 in civil penalties. Sheldon Maschler also has agreed to pay $2,355,304 and McCarty $69,664 in disgorgement of profits and prejudgment interest for their participation in the savings and loan scheme.
Elbogen and Zelcer have consented to final judgments enjoining each from aiding and abetting violations of certain books and records and reporting provisions of the Exchange Act. In addition, Elbogen has agreed to pay $1,422,652 and Zelcer $150,000 in civil penalties.
Raft Investments Inc. and JES Management Corp. have consented to final judgments enjoining each from aiding and abetting violations of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.
Defendants have also agreed to settle administrative proceedings that the SEC will institute based on the entry of the final judgments. Sheldon Maschler, Citron, McCarty, and Erik Maschler have agreed to the institution of proceedings and SEC orders that permanently bar each from associating with any broker or dealer. Heartland has agreed to an SEC order censuring the firm. Elbogen and Zelcer have agreed to SEC orders barring each from associating with any broker or dealer, with the right to reapply after two years in non-supervisory and non-proprietary capacities.
Finally, the SEC today acknowledged the assistance provided by the Office of the U.S. Attorney for the Southern District of New York and the Federal Bureau of Investigation's New York Field Office in the investigation of this matter.
For further information, contact Antonia Chion at (202) 942-4567.See Also: SEC v. Sheldon Maschler, Jeffrey A. Citron, Michael Mccarty, Erik Maschler, Heartland Securities Corporation, Aaron Elbogen, Moishe Zelcer, Raft Investments, Inc., and Jes Management Corporatione Litigation Release 17929, Complaint; Joshua M. Levine Litigation Release 17930, Complaint