Regulators Slap Former Knight Trader with $4M in Fines

April 20, 2005 ( - Federal regulators on Wednesday announced nearly $4 million in fines against the former leading institutional sales trader at Knight Securities and barred him from future securities industry participation.

The US S ecurities and Exchange Commission (SEC) and NASD announced parallel enforcement actions against Joseph Leighton, who was charged with making millions of dollars in fraudulent trades with Knight’s institutional customers, according to  a news release .

The announcement said that 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
  • an NASD fine of $750,000.

According to the news release, 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 Leighton’s 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 (See  Ex-Knight Execs Hit with Supervisory Failure Complaint ). John Leighton is Joseph Leighton’s brother. John Leighton and Pasternak are contesting the NASD charges.

According to the announcement, from January 1999 to September 2000, Joseph Leighton was responsible for generating nearly $135 million in trading profits for Knight – approximately 30% 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.