finra

FINRA

 

For Release:
Contacts:
Wednesday, April 11, 2007
Nancy Condon (202) 728-8379
Herb Perone (202) 728-8464

 


 

NASD Hearing Panel Sanctions Former Knight Securities Executives for Supervisory Failures in Connection with Fraudulent Sales

Washington, D.C. — An NASD Hearing Panel today issued $100,000 fines against Kenneth Pasternak, former CEO of Knight Securities, L.P. (now known as Knight Equity Markets, L.P.), and John Leighton, former head of the firm's Institutional Sales Desk, for supervisory violations in connection with fraudulent sales to institutional customers in 1999 and 2000.

In addition, Pasternak was suspended in all supervisory capacities for two years, while Leighton was barred in all supervisory capacities.

In March 2005, NASD's Department of Market Regulation charged Pasternak and Leighton with failure to supervise the firm's leading institutional sales trader, Joseph Leighton, who is John Leighton's brother. The NASD complaint also charged Pasternak with failing to establish and enforce a supervisory system designed to ensure compliance with federal securities laws and NASD rules.

In a 2-1 ruling, the panel found that Pasternak and John Leighton failed to supervise Joseph Leighton's trading activities. "For all intents and purposes, Joseph Leighton ran the Institutional Sales Department as he saw fit," the majority ruling says. "Pasternak, John Leighton, and Joseph Leighton each concluded that as long as the customers did not learn of the extraordinary profits Knight earned on their orders, there was no limit to the amount the firm could make on an institutional order."

The majority also found that Pasternak's response to numerous red flags was "woefully inadequate," that Pasternak and John Leighton "never questioned Joseph Leighton's activities or confirmed he was providing his customers with best execution and a fair price," and that the overall supervisory void "allowed Joseph Leighton to take advantage of his customers over a 21- month period by filling orders at prices that netted Knight unreasonably high profits."

In April 2005, Joseph Leighton agreed to a bar from the securities industry and a payment of more than $4 million to settle charges by the Securities and Exchange Commission (SEC) and NASD that he made millions of dollars in fraudulent trades with Knight's institutional customers. The SEC and NASD found that Joseph Leighton generated 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 both his pricing and the amount of Knight's profits.

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 $3.3 million of Joseph Leighton's monetary sanction and more than $66 million of the firm's monetary sanction was paid into a Fair Fund established by the SEC to compensate investors harmed by Joseph Leighton's fraud.

Unless the matter is appealed to NASD's National Adjudicatory Council (NAC), or is called for review by the NAC, the hearing panel's decision becomes final after 45 days.

A hearing panel consists of an NASD Hearing Officer and two members of the securities industry. The NAC is a 14-person committee composed of seven industry and seven non-industry members that decides appeals from disciplinary, membership and exemptions decisions, rules on statutory disqualification applications, and advises on other policy matters.

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 registered firms. For more information, please visit our Web site at www.nasd.com.