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.


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