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 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.

The highly-publicized snub made it clear that Datek would need to shake the stench lingering from criminal and regulatory investigations before it could take its act public. To that end, Datek has been wrestling for months with Maschler and Citron in contentious negotiations for the two men's lucrative stakes. While Datek has been profitable for years, with both men out of the picture, the online broker could certainly stand to benefit from an IPO war chest and potentially frothy currency in a highly competitive industry. For years, armchair investors have known that Datek runs circles around most brokers. Soon, those same investors will have an opportunity to own a piece of the pioneering upstart.

Any questions or comments, love letters or hate mail? As always, feel free to forward them to kblack@internet.com.

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