The Securities and Exchange Commission sued a pair of day-trading brokerages Tuesday on charges that they made improper "margin" loans to customers, the first time the nation's top securities regulator has pursued legal action against firms in the controversial day-trading business.
The suits charge that All-Tech Direct Inc. and Investment Street Co., as well as nine people affiliated with the firms, made loans to individual day traders, either directly or indirectly, in violation of federal margin rules, which limit how much money brokerages can lend to customers to buy stocks.
The loans made it easier for customers to continue trading, and thus, generated commissions for the firms, the SEC said. Without the loans, the traders would have had to deposit more money into their accounts or risk having the firms sell stocks they owned.
The suits may be just the start of new troubles for the day-trading industry this week. On Thursday, a Senate subcommittee will begin a two-day hearing that is expected to focus on a wide range of alleged improprieties within the industry.
Day-trading brokerages have mushroomed in recent years, offering thousands of small investors trading technology that enables them to make hundreds of trades in a single day, often in a single stock. The goal is to pull in large profits by repeatedly betting correctly on momentary price moves. But some regulators say many day traders lose huge sums--while the firms rack up hefty commissions.
The SEC hopes to "send a strong message that it's imperative that firms adhere to margin requirements" and other brokerage rules, said Richard Walker, SEC enforcement division chief.
The SEC suits stem from a lengthy agency probe into the day-trading industry. In a sign that the SEC soon may lodge complaints against more firms, Walker said SEC examiners have forwarded about a dozen cases to his division in the last two months.
Without admitting or denying guilt, Investment Street, a little-known Miami firm, has agreed to settle the charges, the SEC said.
However, Montvale, N.J.-based All-Tech, which has more than two dozen branches nationwide, will contest the charges. Unless a settlement is reached, the case would be heard by an SEC administrative law judge. All-Tech is headed by Harvey Houtkin, one of the industry's most controversial figures.
The SEC alleges that All-Tech and seven employees or former employees made 103 improper loans to customers in 1998 totaling $3.6 million. The SEC said the loans were drawn from the accounts of three employees in an apparent attempt to shield All-Tech from charges of wrongdoing.
Bill Singer, an attorney representing All-Tech, denied that the firm played a role in the loans. Instead, the loans were between individuals--a practice known as "journaling"--and are legal, he said.
"We take issue with virtually everything the commission has alleged," Singer said. "What's been alleged here is so blown out of any rational proportion as to be idiotic."
Margin lending has become a hot topic. The New York Stock Exchange and National Assn. of Securities Dealers have proposed to the SEC that some margin rules for day traders be tightened. The proposals would boost the amount of money that qualified day traders can borrow, however--to four times the money in their accounts.
Federal Reserve Chairman Alan Greenspan said late last month that he is concerned with a recent surge in margin borrowing by all investors and said the Fed is studying what to do about it. He's worried that excessive leverage could exacerbate any downturn in the stock market.
The suit against All-Tech is being brought for "political" reasons, Singer said, adding that Houtkin would fight the charges vehemently.
"This is going to be a long and bloody litigation," Singer said. "We may lose it, but we're going to leave blood on the walls."