Ex-Knight Execs Hit with Supervisory Failure Complaint

March 7, 2005 (PLANSPONSOR.com) - Two former executives at Knight Securities have been charged by the NASD with supervisory violations related to the firm's fraudulent sales to institutional clients in 1999 and 2000 that generated "extraordinary" profits.

An  NASD news release said the latest charges were against Kenneth Pasternak, former CEO, and John Leighton, former head of the firm’s Institutional Sales Desk.The company has already paid $79 million to settle NASD and Securities and Exchange Commission (SEC) allegations of defrauding the institutional customers by its leading institutional sales trader – John Leighton’s brother (See  Knight Securities Settles SEC, NASD ‘Best Execution’ Case  ). 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, according to the NASD announcement.

The latest charges accuse Pasternak and Leighton with not properly supervising Leighton’s brother and with not enforcing a system to ensure compliance with federal securities laws and NASD rules. From January 1999 to September 2000, Leighton’s brother was responsible for generating nearly $135 million in trading profits for Knight — or approximately 30% of the trading profits of Knight’s entire Institutional Sales Desk. NASD’s complaint terms the magnitude of the profits generated by Leighton’s brother “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 Schapiro, in the news release. “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.”

According to the news release, 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 charged.  

NASD’s complaint alleges that neither John Leighton nor Pasternak questioned the extraordinary profits or took any steps to see how Leighton’s brother was making them.