Saturday, April 27, 2013

Success Trade Accused of Fraud

Regulator charges parent of Just2Trade with defrauding high-profile investors from the NBA and NFL.

The Financial Industry Regulatory Authority has filed a cease-and-desist order against Success Trade Securities, parent company of online broker Just2Trade, accusing the firm of defrauding 58 investors, including many professional basketball and football players.

In its statement, FINRA alleges that Success Trade Securities, CEO Fuad Ahmed, and other registered representatives at the firm sold more than $18 million in Success Trade promissory notes to these investors, even though the firm’s original filing said it aimed to raise just $5 million. Most of the notes promised to pay annual interest rates of 12.5% on a monthly basis over three years and some offered as much as 26%. That is a very generous rate of return in a near zero-rate environment.

Ahmed conceded to Barron’s last week that his firm exceeded the $5 million goal, but said it was about to issue a new private-placement offering memo with the larger total when the complaint was filed. The money was intended, he says, to further develop the firm’s trading platform and to buy an online broker in Australia.

Just2Trade, based in Washington, was the subject of a recent Electronic Investor column ("Broker Drops Tax Aid,” April 8) about the firm’s puzzling decision to drop tax-record-keeping software, Maxit, from its Website at the height of tax season. The FINRA complaint was filed April 10.

The order says that Success Trade essentially engaged in a Ponzi scheme, using the funds from newer investors to pay interest to those who had invested earlier. FINRA, the self-regulatory group for broker-dealers, says funds were misused to make unsecured loans to several individuals, including Ahmed’s brother, and to pay some of Ahmed’s personal expenses, including clothes and transportation. FINRA didn’t name any of the investors, other than to say they were mostly former and current NBA and NFL players. FINRA’s press release can be found at finra.org, where the 17-page complaint also is available.

Ahmed denies the money went to anything other than the business and says he refused to agree to a settlement that would admit to any wrongdoing.

Success Trade and Ahmed have agreed to the cease-and-desist order and have frozen the fundraising, “based on the belief that ongoing customer harm and depletion of investor assets are likely to continue before a formal disciplinary proceeding against Success Trade Securities and Ahmed will be completed.” Agreeing to the order is not an admission of or denial of guilt. Just2Trade and LowTrades, says Ahmed, continue to operate and aren’t directly affected by the FINRA action.

Success Trade wasn’t generating enough revenue through Just2Trade and LowTrades to meet its costs in recent years, according to the complaint. As a result, it began to borrow. Unlike other brokers, Ahmed’s firm owns the entire process it uses, from what investors see on its Website to back-office servicing. Most brokers use third parties for portions of the process. “We have been going down the path of licensing our trading application, which would be another source of revenue,” he says. FINRA, he adds, didn’t value the operation with that possibility included. Just2Trade, launched in 2007, had fewer than 30,000 accounts at the end of 2012, with approximately $400 million worth of assets. Clients were placing approximately 12,000 stock and option trades per day earlier in the year.

While raising money, representatives of Success Trade apparently used Just2Trade’s appearance in Barron’s annual broker review ("Back Online!,” March 11) for marketing, stating that Just2Trade was one of Barron’s best online brokers. The Barron’s list ranks online brokers. The top brokers receive four or five stars; Just2Trade earned three stars, and appeared on a list of least-expensive brokers. Overall it tied for 16th out of the 24 brokers. LowTrades, the other Success Trades subsidiary, didn’t participate in our survey.

The pro athletes provided most of the money from the fundraising. Many were clients of a firm in McLean, Va., called Jade Private Wealth Management, the complaint said. The firm, which operates out of a location also used by Success Trade, hasn’t been charged. Three of the people employed by Success Trade, which is based in Washington, also work for Jade. Ahmed said he was not involved in raising the debt and would not disclose the names of investors. Jade officials did not respond to e-mails.

An executive at another online investing firm says the problems at Success Trade underscore the difficulty of launching new brokerages. “I really think that the low-commission model only works for firms which have already reached scale. The costs of running a successful online brokerage—technology, regulatory restrictions, good operational staff—are growing every year and, if your margins are slim, I don’t see how you can sustain a business unless you have scale,” he says.

He estimates it costs $25-30 million to get a new broker off the ground. Motif Investing, which just entered the business last year, already has raised more than $50 million in venture capital.

Just2Trade frequently has trumpeted its low-cost approach, but it’s apparent that price alone isn’t a sustainable strategy.

Published in Barron’s Online, April 20, 2013. 

Posted by twcarey on 04/27 at 11:14 AM
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Saturday, April 13, 2013

Broker Nixes Tax Help

With April 15 in sight, Just2Trade decided to get rid of a key tax-accounting feature. A number of customers aren’t pleased.

Talk about terrible timing. With April 15 in sight, online broker Just2Trade dropped a key tax-accounting feature from its Website, leaving some clients scrambling to fill out forms by hand.

Not only does tax day loom, but it’s an onerous one for investors. The Internal Revenue Service has asked brokers and investors to decide how they plan to calculate the cost basis of their investments and has begun phasing in the changes. So it was a surprising time to drop Maxit, a cost-basis management system developed by a company named Scivantage. Just2Trade CEO Fuad Ahmed confirmed that his firm has eliminated Maxit, as did Cameron Routh, an executive vice president at Scivantage.

“We are trying to work with Maxit and our customers to resolve the problem, and I hope we can get this issue resolved,” says Ahmed. Although neither company wanted to go into specifics, it seems they disagreed over who was responsible for cleaning up some data being fed into the Maxit system. Entering inaccurate data means turning out faulty reports.

That was little consolation to Just2Trade clients, who started to alert Electronic Investor about the problem in late March, near the height of the tax-preparation season. Maxit allows customers to generate a Schedule D quickly.

After discovering that the Maxit link was missing, a reader in Alabama says he contacted a Just2Trade representative, who said the firm had “recently severed its relationship with Maxit and cannot currently offer an alternative.” When he asked why customers were not notified, especially with tax time looming, he didn’t feel he got a clear response. So he called again, this time to a supervisor. He says he received an apology but no help in entering hundreds of transactions by hand. The supervisor, added our reader, said the firm didn’t believe that the outputs were accurate enough and that third-party services were subject to change at any time.

In light of the IRS changes, which started to be implemented as of Jan. 1, 2011, having a cost-basis system like Maxit, or its rival Gainskeeper, was seen as a big benefit for clients. Some brokers have written their own cost-basis systems, relying on trading data from their clearing firms. Companies have been hailing their abilities for weeks. Vanguard, for instance, highlights its “cost-basis resource center” on its Website, alerting customers to the new IRS rules as tax day approaches.

A firm like Maxit tracks the cost basis for all transactions, including the complicated adjustments that can occur because of stock splits, mergers, or spinoffs, among many other situations like wash sales. Other brokers offering Maxit to their customers include OptionsHouse, Scottrade, and TradeKing.

The changes at Just2Trade’s Website are very recent. As part of our recent online-broker review ("Back Online!” March 11), Ahmed mentioned Maxit as a key benefit of his low-cost service. Routh of Scivantage says Maxit would be happy to have Just2Trade back as a customer.

In the meantime, however, traders like our reader in Alabama, who says he’s looking for a new broker, are on their own for Schedule Ds this year.

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Published in Barron’s, April 8, 2013. 

Posted by twcarey on 04/13 at 04:02 AM
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