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August 31, 1999

Regulators Blast Day Traders' Tactics: A Day Traders' Spokesman Says NASAA Report Is Ludicrous

By William Hoffman

In a public statement released just after the North American Securities Administrators Association published its bleak report on day trading, the Electronic Traders Association general counsel, Saul S. Cohen, sounded conciliatory.

"We appreciate the work NASAA has done," Cohen's statement for the industry's leading trade group said. "All day-trading firms can and must strive to improve their disclosure mechanisms and their ethical practices."

But in an interview with Traders Magazine a few days later, Cohen was positively profane: "This is truly ludicrous," the attorney said, then added a colorful metaphor a trade magazine cannot print. "The study is phony," Cohen charged. "It's made up out of whole cloth. I don't know how to say it differently."

Misleading Marketing Tactics

The subject of Cohen's ire was NASAA's report claiming the day trading business is fraught with misleading marketing tactics, lax screening of recruits, and loan schemes of questionable legality. The report couldn't have come at a worse time - just weeks after a despondent day trader shot up two firms in Atlanta, taking 12 lives before ending his own.

The NASAA study concluded by endorsing a National Association of Securities Dealers' proposal to heighten disclosure requirements. And it went NASD one better by calling on the organization to ban lending programs that allow day traders to over-extend themselves.

"The state [regulators] have no concept of what markets are or how they work," Cohen argued. NASAA turned down an offer by ETA to pay for a survey conducted by an independent Big Five accounting firm and using a methodology, both of the regulators' choosing, he said.

Then state regulators based their survey of day trading practices on a sample of accounts from one branch office of one day trading firm, Cohen said. There are at least 35 day trading companies, he noted, with at least 4,000 full-time trading clients. Yet from customers, Cohen said, "There ain't no complaints."

David Shellenberger, chairman of NASAA's project group on day trading, and lead author of its report, acknowledged that the organization relied on sampling techniques for its analysis of a typical day-trading operation.

But "we have no reason to believe that All-Tech [Investment Group] sent its worst traders up to its branch office in Massachusetts," Shellenberger shot back, referring to the Montvale, N.J.-based day trading outfit. (All-Tech recently settled civil administrative charges in Massachsetts over allegations that it comingled customer funds and conducted other fraud at a branch there.)

"It's not up to NASAA to help the industry prove its own claims are true," he added. "It's up to the industry to prove that its own claims are based on facts."

Consumer Complaints

Shellenberger, who is also the chief of licensing at the Massachusetts Securities Division, said there had been consumer complaints to state regulators about day trading firms' business practices. He said regulators believe there are many more complaints that have not been disclosed to them, either by firms that don't want the attention, or by customers too embarrassed or guilty to admit they've been had.

"Nonetheless, regulators won't tolerate misleading or deceptive marketing by day trading firms or other types of misconduct detailed in the report," Shellenberger warned. "This is true regardless of whether we receive customer complaints [or not]."

Cohen said day traders and the firms that support them perform an invaluable service by handling limit orders that other market makers won't touch. "When you understand the bigger picture, you know why the SEC hasn't jumped all over the industry with hobnailed boots," he said.

Shellenberger noted that state regulators did not request congressional intervention to rein in day-trading firms. "We're just suggesting that the day trading industry be held to the same standards as the rest of Wall Street," he said.