NASD Charges Knight Securities' Kenneth Pasternak, John Leighton With Supervisory Violations in Fraudulent Sales to Institutional Customers
Washington, D.C.—NASD announced today that it has charged Kenneth Pasternak, former CEO of Knight Securities, L.P., and John Leighton, former head of the firm's Institutional Sales Desk, with supervisory violations in connection with fraudulent sales to institutional customers in 1999 and 2000.
In December 2004, Knight paid $79 million to settle NASD and Securities and Exchange Commission charges that it had defrauded institutional customers through the fraudulent and deceptive conduct of its leading institutional sales trader, who was John Leighton's brother. That sanction included $25 million in fines and a payment of $54 million in ill-gotten profits and interest into a Fair Fund established by the SEC for compensating harmed investors.
The action announced today charges Pasternak and Leighton with failing to supervise Leighton's brother and failing to establish and enforce a system designed to ensure compliance with federal securities laws and NASD rules. NASD's investigation of Leighton's brother is continuing. From January 1999 to September 2000, Leighton's brother was responsible for generating nearly $135 million in trading profits for Knight - or approximately 30 percent of the trading profits of Knight's entire Institutional Sales Desk. NASD's complaint calls the magnitude of the profits generated by Leighton's brother - both in absolute terms and in profit per share - "extraordinary."
"In this case, it is inconceivable that fraudulent trading of this magnitude could go on for so long and generate such an exorbitant amount of excess profits and escape detection by the firm's supervisory systems and the supervisors themselves," said NASD Vice Chairman Mary L. Schapiro. "Supervisors are obligated to take appropriate steps to ensure that persons acting under their supervision comply with securities law and regulations, and we will not hesitate to take action against supervisors who fail to fulfill that responsibility,"
John Leighton was his brother's supervisor and, under a unique profit-sharing arrangement approved by Pasternak, received half of his brother's trading compensation. NASD's complaint alleges that John Leighton received millions of dollars during 1999 and 2000 from his brother's trading profits, including ill-gotten profits from his brother's fraudulent trading. Their profit-sharing arrangement and family ties created an inherent conflict of interest, and gave John Leighton a strong incentive not to question his brother's trading or how he was able to generate such enormous profits. NASD's complaint alleges that John Leighton did not conduct, and did not arrange for anyone else to conduct, any meaningful supervisory review of his brother's trading and did not take any steps reasonably designed to achieve compliance with federal securities laws and NASD rules.
Pasternak was the Chief Executive Officer of Knight and John Leighton's supervisor. Pasternak was also the designated supervisor of the firm's Institutional Sales Desk in John Leighton's absence. NASD's complaint alleges that Pasternak was responsible for the deficient supervisory structure by assigning John Leighton to supervise his brother's trading while at the same time approving their unique profit-sharing arrangement. Pasternak also failed to have the firm adopt any supervisory procedures or systems that would address the conflict inherent in this unusually suspect arrangement and the deficient supervisory structure he approved.
NASD's complaint alleges that although Pasternak knew that John Leighton assigned most of Knight's largest institutional customer accounts to his brother, and knew that Leighton's brother generated an inordinate amount of profits for Knight in absolute terms and a grossly disproportionate amount of the profits of the firm's Institutional Sales Desk, Pasternak did not take reasonable steps to determine whether John Leighton was monitoring or reviewing his brother's trading, did not review or monitor the trading himself, and did not assign anyone else to do so. Neither John Leighton nor Pasternak questioned the extraordinary profits or took any steps to see how Leighton's brother was making them.
Pasternak served on NASD's Board of Governors from May 30, 2000 to Sept. 17, 2001.
Under NASD rules, a firm or individual named in a complaint can file a response and request a hearing before an NASD disciplinary panel. Possible remedies include a fine, censure, suspension, or bar from the securities industry, disgorgement of gains associated with the violations, and payment of restitution.
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.