Former Knight Trader Joseph Leighton Barred, Ordered to Pay $4 Million to Settle Charges of Fraudulent Trades with Institutional Customers
Washington, D.C. — The Securities and Exchange Commission (SEC) and NASD today announced parallel enforcement actions against Joseph Leighton, formerly the leading institutional sales trader at Knight Securities, L.P. (now known as Knight Equity Markets, L.P.). Leighton has been barred from the securities industry and will pay more than $4 million to settle charges that he made millions of dollars in fraudulent trades with Knight's institutional customers.
Leighton's monetary sanction includes: disgorgement of more than $1.9 million in ill-gotten profits; prejudgment interest of more than $660,000; an SEC civil penalty of $750,000, and an NASD fine of $750,000. The disgorgement, prejudgment interest and civil penalty will be paid into a Fair Fund established by the SEC for compensating investors harmed by Leighton's fraud. In December 2004, Knight paid more than $79 million to settle SEC and NASD charges against the firm arising from Joseph Leighton's fraudulent and deceptive conduct. More than $66 million was paid into the Fair Fund.
"Fraudulent trading of this magnitude - extracting millions of dollars in excess profits from institutional investors over a period of nearly two years - merits the strongest possible sanctions," said NASD Vice Chairman Mary Schapiro. "Joseph Leighton is paying the highest price NASD can impose - a permanent bar from the industry."
In March 2005, NASD charged former Knight CEO Kenneth Pasternak and John Leighton, the former head of Knight's Institutional Sales Desk, with supervisory violations in connection with Joseph Leighton's fraudulent trades. John Leighton is Joseph Leighton's brother. John Leighton and Pasternak are contesting the NASD charges.
From January 1999 to September 2000, Joseph Leighton was responsible for generating nearly $135 million in trading profits for Knight - approximately 30 percent of the trading profits of Knight's entire Institutional Sales Desk. NASD found and the SEC alleged that Joseph Leighton generated approximately $41 million dollars in excessive profits by pricing trades with institutional customers in a manner contrary to customers' expectations and industry custom, and using deceptive trading practices to disguise his pricing and the amount of Knight's profits. Joseph Leighton left Knight in 2000.
Joseph Leighton's institutional customers believed that the prices they paid for trades were based upon Knight's cost in acquiring (or selling) shares to fill their orders. Instead, Joseph Leighton had Knight acquire (or sell) a stock position after he received an institutional customer's order, and then waited until the price of the stock moved before executing trades to fill the customer's order, creating greater profits for Knight at the expense of his customer. If the price of the stock moved in favor of Knight's position, Joseph Leighton delayed executions and traded with his customers at prices reflecting the positive price movement. If the price of the stock moved against Knight's position, Joseph Leighton executed trades with customers based upon prices at an earlier time, which were more advantageous to Knight.
NASD found that Joseph Leighton did not disclose to customers how he priced trades, or the fact that he was not pricing trades based on Knight's costs. His course of trading deceived customers about Knight's cost of acquisition (or sale) and the profits he was making on trades with them. Leighton used that deception to make tens of millions of dollars in excessive profits for Knight at his customers' expense.
NASD also found that Joseph Leighton engaged in fraudulent trading in his proprietary "back book" account at Knight. Leighton received a greater payment for trading profits generated in his back book account than he did for customary trades with Knight's institutional customers. Without disclosing it to his institutional customers, Leighton traded with them in his back book account, taking the opposite side of trades with them at prices that were extremely profitable for him and disadvantageous to his customers.
In settling this matter with NASD, Joseph Leighton neither admitted nor denied the charges, but consented to the entry of NASD's findings. Without admitting or denying the allegations in the SEC's complaint, Leighton consented to the SEC's entry of its judgment and administrative order.
Investors can obtain more information about, and the disciplinary record of, any NASD-registered broker or brokerage firm by using NASD's BrokerCheck. NASD makes BrokerCheck available at no charge to the public. In 2004, members of the public used this service to conduct more than 3.8 million searches for existing brokers or firms and requested almost 190,000 reports in cases where disclosable information existed on a broker or firm. Investors can link directly to BrokerCheck at www.nasdbrokercheck.com. Investors can also access this service by calling 1-800-289-9999.
NASD is the leading private-sector provider of financial regulatory services, dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. NASD touches virtually every aspect of the securities business - from registering and educating all industry participants, to examining securities firms, enforcing both NASD rules and the federal securities laws, and administering the largest dispute resolution forum for investors and member firms. For more information, please visit our Web Site at www.nasd.com.