firewalls to protect people from your experience. One of them was a training course which virtually everyone has conceded was totally inadequate to-

Ms. HARLACHER. Absolutely, but there are training courses and training courses, as I have since discovered.

Senator DURBIN. Yes, you have. So you learned that hardware that you were going to work with

Ms. HARLACHER. Absolutely.

Senator DURBIN [continuing]. But you did not learn about the volatility of the market and how you could profit from it?

Ms. HARLACHER. Nothing whatsoever about that.

Senator DURBIN. Is that your experience, Ms. Margala?

Ms. MARGALA. I never took the training course. It was discussed-it was offered to me. However, I did not have-I came in with $20,000. Mr. Parish at that time knew I did not have the money for it. He did not require that I take the course.

Senator DURBIN. At any point, did this sound too good to be true? Ms. MARGALA. In hindsight, maybe, not then.

Senator DURBIN. Let me ask you about margin calls, because we have built this into the whole system with the idea that people just could not go crazy. At some point, you had to have real money. You just could not speculate beyond your means.

Now, I believe in your testimony or one of the others on the panel suggested that margin call requirements could not keep up with the trading and volume on a day-to-day basis. Is that what you said earlier? I do not want to put words in your mouth.

Ms. MARGALA. If you mean by that-what actually I found is that I did not know that I had generated half the margin calls I did, and these were like-some were on a daily basis. In other words, there are different types of margin calls. One, I believe, is a Regulation

Senator DURBIN, T.

Ms. MARGALA [continuing]. T, thank you. And one was sort of like daily margin call, a maintenance call, like a maintenance margin call. So I had generated a lot of maintenance margin calls, but I had to borrow money for numerous margin calls. I had to borrow from my father. I had-$20,000 is not all that I put into the account. There are numerous margin calls, more money that I had to put in afterwards to cover margin calls.

Senator DURBIN. So the margin call system was working in your situation as you understand it? I mean, you kind of knew how you were sinking. You could feel it on a day-to-day or week-to-week basis?

Ms. MARGALA. No, it was not working. This was after the fact. It is like you have got a margin call. Well, how did that happen? You sort of did not know how it happened, or I did not, anyway. Senator DURBIN. But what I am trying to get to is your experience took place over how many weeks or months?

Ms. MARGALA. I was there-I started trading sometime in early September and left in 1988 and was gone by the beginning of Janu

ary.

Senator DURBIN. Eighty-eight or 1998?

Ms. MARGALA. The beginning of-

Ms. MARGALA. December 1988 to January 1999.
Senator DURBIN. September 1998 to--

Ms. MARGALA. Ninety-eight, I am sorry.

Senator DURBIN. So this was a matter of, let us say, 4 or 5 months that you were involved in this, and what I am saying is you came in with this $20,000 that you initially were involved in, but did you know through your experience that you were getting further and further behind because of the margin calls?

Ms. MARGALA. Yes, as I was getting the margin calls. But what Barry Parrish would do-who was the manager-would borrow money from other people, put it in my account, and then until I built it up again to pay back, which, of course, encouraged more trading and more commissions for All-Tech.

Senator DURBIN. Do you have any idea how much money you gave to this firm in commissions over that 4- or 5-month period of time?

Ms. MARGALA. I am in the process of calculating that, but I can tell you it is in the thousands.

Senator DURBIN. Over $10,000?

Ms. MARGALA. I am not sure. I cannot

Senator DURBIN. Ms. Harlacher, what was your situation with the margin calls? Did they give you any warning that you were in trouble?

Ms. HARLACHER. I used to call all the time and speak to Barry Parish about the margin situation because I did not want to risk having a margin call myself. But I was asked on two occasions to lend a substantial amount of money to another trader to cover his margin calls and I was not paid any interest for these loans, none whatsoever. So the money was journaled out of my account overnight and then journaled back in the next day, and the way I was able to keep up with whether or not what needed to be done had been done was we were given a sheet of paper with our buying power every day and I used to ask for accountability that I had got the money back.

Senator DURBIN. So this Mr. Parish, with his svengalian qualities, would come in and say, we want to borrow money from you and not pay you interest on it and we will give it back to you tomorrow?

Ms. HARLACHER. He did not put it quite that way. He just said, somebody has had a margin call and you have money in your account, would you please assist, giving one the impression that you were duty-bound to say yes. Otherwise, if you refused and you ever got into trouble, then no one would help you.

Senator DURBIN. Amazing. It is said in here that if day traders stick with it for 6 months, they tend to be profitable, at least one of the studies that we have looked at, and also that it takes 3 to 5 months to come to some understanding of what is really happening here.

Ms. HARLACHER. I think it takes longer than that for a lot of people.

Senator DURBIN. That is true.

Ms. HARLACHER. A few people "get it" in that time but most peo

Senator DURBIN. I just wonder if, as we look at this and consider legislation, if some of the requirements about the size of your account and the margin calls might have something to do with how long you have been in the business and how frequently you trade and what your sources of money might be. To think that the firm that you are trading for, earning commissions for, is loaning you money and moving money between accounts just seems to me to be counter-productive. I cannot believe the securities industry is anxious to defend this practice at all.

Ms. HARLACHER. Well, from my point of view, what I believe is really necessary in order to succeed in this business is a thorough knowledge and understanding of the market through a lot of experience of having studied it. The things that I learned from the Series 7 which I found were terribly important were the knowledge of options and margin. I think people need to understand those in greater detail.

But what I really consider to be indispensable is the knowledge of charting and technical analysis, and I believe people also need to know some fundamental analysis so that they can assess whether or not what they are buying is a good investment before they even get involved. And I think those are things that a lot of people do not understand or have any knowledge of and I think those are the things that need to be understood.

Senator DURBIN. Thank you very much. Thank you, Madam Chair.

Senator COLLINS. Thank you, Senator Durbin.

I want to thank our witnesses on the panel today. You have been extraordinarily helpful to the Subcommittee in letting us know firsthand experiences of consumers. So we very much appreciate your willingness to testify and we thank you.

I will now call forward our final panel of witnesses this morning. All of the individuals are or were associated with Providential, AllTech, or Momentum Securities firms in dealings with the customers whom we just heard from.

Huan Van Cao was a day trader at Providential's Los Angeles branch office. He traded the account of Ms. Le and other Providential customers during the spring and summer of 1998. He is appearing today pursuant to a subpoena.

Fred Zayas was the former Branch Manager of All-Tech's office in Watertown, Massachusetts. Last year, he entered into a settlement agreement with State securities regulators in Massachusetts and he, too, is testifying today pursuant to a subpoena.

Barry Parish was the branch manager of All-Tech's office in San Diego, California. Mr. Parish ran the San Diego office when Ms. Margala and Ms. Harlacher first became day-trading customers of All-Tech.

Justin Hoehn is currently the Branch Manager of Momentum's office in Atlanta, Georgia. Mr. Hoehn was a close friend of Scott Webb and was instrumental in getting Mr. Webb involved with day trading.

Pursuant to Rule 6, all witnesses are required to be sworn in. I would ask that you all stand and raise your right hands. Do you

committee will be the truth, the whole truth, and nothing but the truth, so help you, God?

Mr. HOEHN. I do.
Mr. ZAYAS. I do.
Mr. CAO. I do.

Mr. PARISH. I do.

Senator COLLINS. Thank you. I would like the attorneys who are here this morning to briefly introduce yourselves and advise the Subcommittee whom your client is. Mr. Berman.

Mr. BERMAN. Yes. Thank you, Chairman Collins. My name is Norman Berman. My firm is Berman, Devolario, and Pease, and I am here representing Mr. Zayas.

Senator COLLINS. Thank you. Mr. Ambrose.

Mr. AMBROSE. Thank you. I am John Ambrose representing Barry Parish.

Senator COLLINS. Thank you very much.

Each of our witnesses on this panel has the opportunity to make an oral statement this morning as well as to present any written testimony that you wish for the hearing record. I am going to ask if any of you has a statement you would like to present to the Subcommittee before we move to questions.

TESTIMONY OF JUSTIN HOEHN, BRANCH MANAGER,

MOMENTUM SECURITIES, ATLANTA, GEORGIA

Senator COLLINS. Mr. Hoehn, do you have a statement you would like to make?

Mr. HOEHN. No, I do not.

TESTIMONY OF FRED ZAYAS, FORMER BRANCH MANAGER, ALL-TECH DIRECT, WATERTOWN, MASSACHUSETTS

Senator COLLINS. Mr. Zayas, do you have a statement you would like to make?

Mr. ZAYAS. No, I do not.

TESTIMONY OF BARRY PARISH,1 FORMER BRANCH MANAGER, ALL-TECH DIRECT, SAN DIEGO, CALIFORNIA

Senator COLLINS. Mr. Parish, do you have a statement you would like to make?

Mr. PARISH. Yes, I do.

Senator COLLINS. Please proceed, Mr. Parish.

Mr. PARISH. Thank you, Chairman Collins and Senators Levin and Durbin. Before I read my comments, I would like to state that the statements that we have heard so far today are completely at odds with the record that I am happily here to cooperate with and present to you.

I became interested in day trading when I learned from my previous job as a branch manager of a brokerage firm that major profits were being made by SÕES traders. Back in those days, they were called SOES bandits. I determined that SOES trading must be a profitable enterprise, and so, therefore, I started exploring the SOES business. I answered an ad by All-Tech and paid substantial

1The prepared statement of Mr. Parish with attachments appears in the Appendix on page

money to purchase equipment and be trained to head an All-Tech office.

Very early in my management, I encountered a situation in which a trader had made a computer mistake and had generated a margin call. In the early days, there were no safeguards on the equipment. All-Tech headquarters gave me forms, an example of which is attached, to journal money from one account to another to satisfy the margin call. The donor in the journal complained about the risk, what would happen to his money in the event of the death of the recipient of the money, and All-Tech headquarters' solution was to prepare both the donor and the recipient journals simultaneously, fax them into headquarters, and have them approved, which was done.

So this was the first of hundreds of journals to satisfy margin calls. My office did the administrative handling of these journals, together with the headquarters, and we also helped in finding other customers willing to journal funds. On two occasions, though, I should have known better. I journaled money from my own personal account to assist customers with their margin calls. I also overlooked the fact that although Adam Leeds acted in my office as a trader, he in time became an employee of the firm and, therefore, his involvement subsequent to his employee relationship was improper.

In approximately the late spring of 1999, headquarters began to require notarized signatures on journals and the software was improved so that it was possible to prevent unwanted margin calls. I used this opportunity to put an end to journaling in my office. Journaling had been a product of the day-trading software and it was made unnecessary by software improvements. As mentioned in the 12 customer declarations attached to this exhibit, journaling was an unwelcome headache to me and to my staff.

As is evidenced by the 12 customer declarations, risk disclosure and warning was a constant theme in my communications with customers. Attached hereto with the intention of being made a part of the record are 12 declarations from customers with various degrees of exposure to the day trading milieu in the San Diego office. Senator COLLINS. They will be made part of the record.

Mr. PARISH. Thank you. Although simplistic and obviously designed to support me, these declarations were obtained from a hastily-called get-together in which 20 people were invited. No one refused to help if given proper notice. The supplemental declarations are certainly not meant to be rude to the Subcommittee or other investigative agencies, but to give a flavor of the temperament of many traders.

I stand ready to cooperate with the Subcommittee and other agencies to learn the facts and make decisions designed to promulgate clear rules that fit new technology while minimizing adverse effects on customers. Thank you.

TESTIMONY OF HUAN VAN CAO, DAY TRADER AT PROVIDENTIAL SECURITIES, FOUNTAIN VALLEY, CALIFORNIA Senator COLLINS. Mr. Cao, do you have a statement you would like to make before the Subcommittee?