iCapital Fined for SOES Misuse

January 25, 2002 (PLANSPONSOR.com) - The Securities and Exchange Commission (SEC) charged an investment company with securities fraud and violations of SEC rules on broker-dealer books and records and reporting requirements.

The SEC censured iCapital Markets LLC, formerly Datek Securities Corp., and fined the firm $6.3 million.

According to SEC investigators, from at least 1993 through March 1998, Datek illegally executed proprietary trades through the Nasdaq Stock Market’s Small Order Execution System (SOES). Datek sold its day-trading unit in 1998.

Officials said the SOES system was designed for small public customers, and until last year, a broker-dealer was prohibited from using the SOES system to trade for its own account.  The SOES system is a Nasdaq trading system that offers automatic execution at the best available price.

By hiding its use of the SOES system for proprietary trading, Datek Securities obtained the benefit of SOES automatic execution, which gave it a significant advantage when combined with Datek Securities’ day-trading software, the SEC said.

In fact, the SEC said, investigators found that Datek Securities fraudulently used the SOES system to execute millions of proprietary trades, resulting in tens of millions of dollars in trading profits. 

Datek Securities used sophisticated software, dozens of nominee accounts, concealment and misrepresentations to regulators, fictitious books and records, and false reports filed with the Commission, investigators reported.

Other findings in the SEC’s Friday order included that:

  • from at least 1993 through March 1998, Datek Securities’ New York City branch operated as a day-trading firm. Unlike other day-trading firms that provide services for customers who trade for their own accounts, Datek Securities traders focused on the firm’s proprietary accounts. Datek’s volume of proprietary trading through SOES was enormous – more than 30% of all SOES trades came from Datek from 1995 through March 1998,
  • to hide its proprietary trading, Datek Securities set up nominee accounts and paid the nominees for the use of their identities and complete discretionary trading.  Initially, nominees provided their own funds to set up the accounts, and Datek Securities promised to pay them a fixed rate of return,
  • in 1997, firm principals began funding nominee accounts from the illegal SOES scheme. Between May 1997 and March 1998, the principals funded over 125 nominee accounts with at least $50 million, and
  • in 1995 and 1996, Datek Securities paid more than $200 million to firm principals.  Datek falsely recorded and reported the payments of trading profits, which were made to companies owned by the principals, as expenses for “computer services”.