Besieged Day Trading Firm to Close Down

A boutique Orange County brokerage, spotlighted in a U.S. Senate investigation of day trading abuses and subsequently severely restricted by regulators, said Tuesday it will cease operations.

Providential Securities Inc., which caters to Asian immigrants, will close its remaining 1,500 investors’ accounts, transfer them to other brokerages and withdraw from the National Assn. of Securities Dealers, the industry’s self-regulating body.

Providential had 10 offices in Southern California, Oregon and New York when the eight-month Senate investigation into day trading was made public in February. Henry Fahman, chairman of Providential Securities’ holding company, said Tuesday it now has just three offices--its Fountain Valley home office and branches in Alhambra and New York.

Fahman said, however, that it was the NASD that had effectively shut down Providential’s business in August when it placed restrictions that allowed the firm only to liquidate clients’ accounts. He said NASD took the action after reviewing Providential’s accounting practices.

According to Fahman, Providential had about 5,000 accounts with more than $100 million when NASD restricted it in August. On Tuesday there remained only about 1,500 accounts with less than $20 million.

Nancy Condon, a spokeswoman for NASD’s regulatory arm, declined to discuss the case. “We can’t comment on ongoing investigations,” she said.

Fahman said that Providential’s parent company, Providential Holdings Inc., will continue with its plans to acquire a San Francisco investment firm, Holt & Collins, which has no day trading operations. He added that he hopes former customers will return and open accounts at that firm.

Acquiring Holt & Collins would require the approval of NASD regulators, Condon said.

Fahman said that if his company completes its agreement to acquire Holt & Collins it will not conduct day trading--the controversial practice that allows individual investors to make rapid-fire trades using high-powered computers.

The Senate staff investigation on day trading found the industry rife with “disturbing business practices.” The main problem was operations that overstated the potential for profits and understated risks, said the Senate report.

The report made Providential a case study, examining the practices of some of its employees as examples of the abuses in the day trading industry.

One case involved a part-time clerk at a record store in Orange County’s Little Saigon area who said she was guaranteed a 20% annual return if she allowed a Providential day trader to handle her investment. She lost $35,000 of the $48,000 invested, part of it borrowed from her elderly mother. An NASD arbitration panel awarded her $38,000 in a claim against Providential, its employee and others.

Fahman denied wrongdoing, saying the employees in question had begun the questionable practices at another firm before joining his company.

Providential Holdings, the parent company, became a publicly held business in February by merging with a public consulting firm. The accounting dispute that resulted in the NASD restriction occurred after the books of the two enterprises were merged. Regulators objected to Providential’s inclusion of illiquid real estate assets, such as its offices, in its calculations of its net worth, according to Fahman.

Providential Securities, which is Providential Holdings’ principal business, had an operating loss of $647,000 on $5.87 million in commissions and fees during calendar 1999, according to SEC filings. Providential Holdings’ latest filing, for the January to March period, shows both revenue and losses were sharply higher than a year earlier.

The quarterly filing, made in May, said Providential had settled some small damage claims by brokerage customers but intended to defend itself vigorously against other claims large enough to have a material effect on its business. It also said it expected NASD to impose fines as a result of its examination of Providential Securities.

Despite those problems, Fahman said his company plans to press ahead with plans to diversify into related financial services online such as banking and real estate through acquisitions and joint ventures. In a recent SEC filing, Providential stated it hopes to use stock to buy companies with financial and technological expertise.

Providential’s stock, which trades over the counter, closed at 22 cents a share Tuesday, down 3 cents. Its high, recorded March 10, was $3.66.

Nasdaq appended an “E” to the stock symbol, a warning that it is late in making a public filing. Fahman said he’ll make the filing after a new accounting firm adjusts the books to suit regulators, a process he said will be completed by next week.