and capital just trying to break even before accruing one cent of profit. Another troubling finding of our investigation related to the quality of the management and supervision of day-trading firms. Some day-trading firms have hired unqualified personnel to manage their branch offices. For example, some firms have hired branch managers who have little or no prior experience in the securities industry and some who were not even licensed. They have also failed to adequately train and supervise branch personnel after they were hired. And, despite their claims to teach customers everything necessary for day trading, many day-trading firms have provided their customers with poor training, training that gives customers a false sense of security about day trading and their likelihood of success. For that training, customers paid thousands of dollars, and in fact, most day traders end up losing money. The testimony over the next 2 days will focus primarily on the case study firms All-Tech, Providential, and Momentum. I would like to now direct your attention to Exhibit No. 150.1 We have prepared this chart to help you understand the relationships between the hearing witnesses and the case study firms. Today, you will hear from former customers of these firms or their representatives. They will be followed by former and current branch managers of the firms, as well as one third-party trader. The chief executive officers whose names appear on the second line of the chart will each testify tomorrow morning. Harvey Houtkin is the CEO of All-Tech, Henry Fahman is the CEO of Providential, and James Lee is the President of Momentum. In conclusion, the Subcommittee's investigation uncovered many disturbing, and in some cases illegal, practices by the day trading industry. Chairman Collins, I would be pleased to answer any questions that you and the Subcommittee Members might have. Senator COLLINS. Thank you very much, Ms. Field. I want to commend you for your excellent overview of the investigation and also to thank you for the expertise that you have brought from your position with the SEC's Enforcement Division to the Subcommittee. Your expertise in SEC and securities matters, and particularly on the enforcement side, have greatly assisted the work of the Subcommittee. I just want to ask you one question and it deals with an issue that you touched on in your statement. You mentioned that while day traders may not be paying that much per trade as a commission, that because they trade so frequently, they end up paying exorbitant commissions and that makes it very difficult for them to turn an actual profit. It is one reason the losses are so great for most day traders, is that a fair summary? Ms. FIELD. Yes, Chairman Collins, that is a fair summary. They make so many trades a day that when added up in the aggregate, it often accounts for a tremendous portion of their losses. Senator COLLINS. The Subcommittee's estimate is that the day traders, on average, at the firms that we surveyed would actually have to make more than $111,000 a year just to pay commissions. Have you discussed the issue of commissions with the regulators and do you have some idea of whether the Subcommittee's findings are similar to the findings of the SEC and the State regulators? Ms. FIELD. Yes, Chairman Collins, I have done that. I spoke with the regulators and what I understand from my in-depth conversations with them is that our findings are actually quite conservative. There is another study that is coming out that I think we will probably hear about later in this hearing which I think would show that our estimates are quite conservative and that, in fact Senator COLLINS. You mean on the low side? Ms. FIELD. Yes, exactly. When I say conservative, I mean being on the low side, and that, in fact, it may be that the number could be quite a bit higher, depending on an individual trader's strategy. Senator COLLINS. I bring up this issue because I believe that if most day traders were told when they were opening an account that they would have to clear more than $111,000 a year just to pay the commissions before they earned a cent of profit for themselves, that many of those day traders, potential customers, would decide not to engage in day trading. It would help them better understand how risky this business is and how high the commissions are. Ms. FIELD. I would certainly agree with that. Senator COLLINS. Thank you, Ms. Field. Ms. FIELD. Thank you. Senator COLLINS. Thank you very much. Senator Levin. Senator LEVIN. I just want to thank you for your work. It is extraordinarily helpful, professional, balanced, and thorough, and I just am most appreciative and I know every Member of this Subcommittee has benefitted from it. Thank you. Ms. FIELD. Thank you, Senator Levin. Senator COLLINS. Senator Durbin, welcome. If you have any opening statement you want to make at this time, feel free to do So. OPENING STATEMENT OF SENATOR DURBIN Senator DURBIN. In the interest of getting to the witnesses, I would like to just submit this for the record and thank you for your work on this. Senator COLLINS. Thank you, Senator. [The prepared statement of Senator Durbin follows:] PREPARED STATEMENT OF SENATOR DURBIN I'd like to thank Senator Collins and Senator Levin for holding this hearing on the rapidly growing practice of "day trading." The electronic day-trading industry has attracted thousands of individual investors who engage in the risky practice of riding the stock market's ups and downs, trying to squeeze out profits by rapidly buying and selling shares. The advent of the electronic communication networks and the Internet has dramatically changed the nature of the securities market and has made day trading possible for people other than traditional brokers. Today's market is more of a populist place the masses on Main Street now have almost as much information as the aristocrats who long ran Wall Street. Armed with instant information from the Internet and CNBC, and enabled by rapid trading systems, people with very little if no investment experience are becoming day traders. The passion for trading by ordinary investors hasn't just affected a few select stocks, however. It has reshaped the entire market landscape. Since 1996, the size of the average trade on the Nasdaq has dropped 50 percent, to just under 700 The average Nasdaq stock is now held for just 5 months down from 2 years a decade ago. Meanwhile, trading volumes has surged-the month of January was the busiest ever for both Nasdaq and the New York Stock Exchange. With an estimated 10 to 15 percent of Nasdaq trading volume attributable to day traders, their impact on the markets will continue to grow. Hand in hand with the frenetic pace of trading is increased volatility. While we have all heard the countless stories about day traders who make it big, the other side to that coin is others who lose everything. As Securities Exchange Commission Chairman Arthur Levitt emphasized in his testimony before this Committee last fall: Day trading is VERY RISKY. Of the reported 287 day-trading firms nationwide, 29 are in my home State of Illinois. This figure does not include the number of firms that individuals may access over the Internet. The Illinois Securities Department in the Secretary of State's office is currently investigating several complaints filed against day-trading firms. A chief concern of Illinois officials is that day traders receive very limited education for what is a very sophisticated market, causing some traders to mortgage their homes and sell other possessions to continue the practice. I share the Committee's concern in ensuring that people engaging in day trading know what they are getting into. I welcome today's opportunity to learn more about the risks of day trading, its impact on the securities market and its effect on investor behavior. Finally, I want to welcome Ms. Alyce Wenzel who is here today from Huntley, Illinois and will share the tragic story of her son, Scott Webb. Thank you. Senator COLLINS. I would now like to welcome our second panel of witnesses this morning. Each of these witnesses was formerly a customer of either Momentum, Providential, or All-Tech day-trading firms, or they are here today on behalf of former customers of the three day-trading firms that have been the focus of the Subcommittee's investigation. Our first witness is going to be Alyce Wenzel of Huntley, Illinois, a constituent, I realized belatedly, of Senator Durbin. Ms. Wenzel's son, Scott Webb, was a day trader at Momentum's office in Atlanta, Georgia, for 1 year before he was tragically shot and killed last summer. Ms. Wenzel will discuss how her son came to be a day trader, his financial condition at the time, and his experiences day trading at Momentum. Our next witness will be Steve Buchwalter, who is an attorney for Amy Le, a former customer of Providential in Los Angeles. Mr. Buchwalter is testifying on behalf of Ms. Le, who unfortunately is very ill and unable to come to Washington. Mr. Buchwalter will tell us how Ms. Le was induced to open a day trading account by a Providential day trader named Huan Van Cao and how Mr. Cao fared when he day traded Ms. Le's life savings. Next, we will hear from Carmen Margala and Sandra Harlacher, who are both former customers of All-Tech. They will discuss how they were first attracted to day trading at All-Tech and their experiences trading at the San Diego branch office. I want to thank you all for coming forward this morning and I would ask that you all stand so that I can swear you in. Do you swear that the testimony you are about to give to the Subcommittee will be the truth, the whole truth, and nothing but the truth, so help you, God? MS. WENZEL. I do. Mr. BUCHWALTER. I do. Ms. HARLACHER. I do. Senator COLLINS. Thank you. Before this panel begins, I just difficult to come forward and publicly discuss your experiences day trading. No one likes to admit that they have lost money. None of us likes to admit that we have made mistakes or investment decisions that did not work out well, and I know that it is especially hard to do this in a public setting. So I want to thank you very much for being willing to come forward. Your testimony is so important to us and it is so important to other people who may be considering day trading. I believe that by sharing your experiences, you will save many other people the financial losses and the embarrassment and pain that you have experienced. So I want to just personally express my appreciation to you and to commend you for coming forward. Ms. Wenzel, we are going to start with you. Again, I also want to personally express to you my sorrow over the loss of your son, and I know I speak for not only the Subcommittee Members but everybody here in doing so. Would you please proceed. TESTIMONY OF ALYCE WENZEL,1 MOTHER OF SCOTT WEBB, FORMER DAY TRADER WHO WAS SHOT BY MARK BARTON IN THE ATLANTA OFFICE OF MOMENTUM SECURITIES, HUNTLEY, ILLINOIS Ms. WENZEL. Thank you, Senator Collins, Senator Levin, and Members of the Subcommittee. My name is Alyce Wenzel and I appreciate the opportunity to share my story with all of you here today. I do so on behalf of my son, Scott Webb. As many of you know, Scott was a day trader at Momentum Securities in Atlanta, Georgia, who was senselessly murdered by Mark Barton on July 29, 1999. The loss of my son continues to haunt me today and it is still very difficult to talk about the incident and to reflect about him. Particularly troubling, though, is what I have learned about the world of day trading subsequent to his death. In fact, I wish I knew as much back then about this practice as I do now because I would have done everything within my power to keep Scott from getting involved in day trading in the first place. My hope is that by communicating the story of my son today, others interested in day trading might better understand the many risks and dangers associated with this industry. To begin, my son was an extremely bright, enthusiastic, and a very thoughtful person. He was also a very hard worker. Despite this, he experienced a number of setbacks in the months leading up to 1998. Among them, he lost the job that he loved at Enterprise Rent-a-Car, and then again, he was let go from Dean Witter for not meeting required quotas as a broker. I recall being concerned about his confidence and spirit after these layoffs. Shortly thereafter, though, he called me to say that he had found a new way to make a living, day trading. I admit, at the time, I knew little about day trading, but based on how optimistically Scott described the practice, it sounded like a positive step for him. My daughter corroborated his optimism about day trading when she indicated that Scott told her, "I think I have finally found my niche." He informed us that he was going to relocate to Atlanta from St. Louis with a friend and start day trading at a company called Momentum Securities. In preparation for this, he traveled to Tyler, Texas, to be trained. While there, Momentum put Scott up in a lavish apartment, and as my daughter described, wined and dined him. With that, he packed up and moved to Atlanta with expectation of being a successful day trader. Not long after Scott arrived, Scott started having troubles. His credit record was poor, a point illustrated by the fact that his father had to cosign for his car loan. He also had very little cash resources, so once again, he turned to his father, who loaned him $30,000 for his day trading activities. In addition, Scott did not have any other sources of income at the time, and this concerned me. Despite all of these facts, Momentum allowed my son to open a day trading account. After his death, I learned that Scott also borrowed $30,000 from a Momentum customer from Tyler, Texas, on the day he opened his account. Unbelievably, he did so at an annual interest rate of 18 percent. With the capital he was able to scrape together, Scott started trading. Based on what he confided to me, my daughter, and his girlfriend, my son lost money from the beginning. And in addition to the obvious pressures that accompany financial strains, I noticed a very real effect on Scott in general. His girlfriend described him as depressed often about his financial situation. When I spoke with him, he was not himself and he appeared to be under extreme pressure and stress. Right before his death, I called Scott to inquire if he was going to attend his cousin's wedding in California, and he responded that his financial situation was such that he did not know whether he had the money for a plane ticket for the event. As I sit here today, I still cannot understand why my son was allowed to trade at Momentum. He made decisions that never should have been presented to him as an option for a person in his financial situation. And I firmly believe that he was not adequately prepared for the harsh realities of day trading. I also am surprised that he was hired by Momentum to train other customers. Scott had a gift for working with others, but given the fact that he had not been successful as a day trader himself, it does not make sense to me that Momentum would ask him to show people how to trade. After his death, I was shocked to learn that Scott had tried day trading before he moved to Atlanta and was not successful. All told, he lost approximately $10,000 of borrowed money. Sadly enough, Momentum officials knew this before he opened the account with them, and yet they still allowed him to trade. My son was not an appropriate person to be day trading based on his financial situation and his background experience. For these reasons, he should never have been at Momentum in the first place. I hope my words provide comfort to all of those who lost family and friends on that awful July day. I also hope that by hearing Scott's story, people will take a closer look at day trading and realize the incredible risks inherent to this practice. By doing so, they might avoid some of the insurmountable pressures my son experienced. Thank you very much for inviting me here. Senator COLLINS. Ms. Wenzel, again, thank you so much for your |