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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