Datek Scrubbing its Boiler Room Roots
One of the best online discount brokers in the business is bending over backwards to get better. Datek Online is close to unveiling a deal that would sell the majority interests of its two questionable principal shareholders, Jeffrey Citron and Sheldon Maschler, to a group of private equity firms for nearly $700 million. Bain Capital is expected to lead the investment to buy out the pair's 52% stake, chipping in $300 million, with the remaining $400 million coming from smaller investors.
The sale is crucial, because Datek's shady past has forced the firm to shy away from tapping the new issues market with a blockbuster IPO. Two years ago, the newcomer shelved its plans to shake the IPO money tree when the Manhattan district attorney's office announced it was conducting an investigation into a possible money-laundering scheme involving Datek's day-trading arm, spun off in 1998 as Heartland Securities. In addition to the cloud of uncertainty surrounding offshore transactions and alleged illegal trading practices by the day-trading unit, Datek's former chief executive, Jeffrey Citron, and former chief trader, Sheldon Maschler, have also added to the laundry list of indiscretions.
While the two men almost single-handedly turned Datek from a small-time Brooklyn boiler room into the nation's six largest online broker with more than $14 billion in assets, the duo have lately become more a liability than an asset. The 55 year-old Maschler was the target of an SEC lawsuit two years ago based on his involvement with a pump-and-dump stock scheme, while 30 year-old Citron was fined for trading violations by the SEC during his watch at Datek's day-trading unit. To make matters worse, the pair has been closely tied to infamous penny stock promoter, Bob Brennan, who has been banned for life from the securities business.
In the summer of 1999, Paul Allen's Vulcan Ventures agreed to sink $100
million into Datek's nascent Island ECN subsidiary, along with two other
investors that planned to invest an additional $200 million. The
Microsoft
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up for my DealTracker newsletter. co-founder promptly backed out of the
deal after rumors began circulating over the ongoing investigation into
Datek's past improprieties. While the two remaining investors opted to
follow through with their $200 million investment in Datek's electronic
trading network, TD Waterhouse decided to follow Allen's lead, backing off
plans to invest $25 million for a 12% interest in the subsidiary.