The Securities and Exchange Commission and NASD today announced parallel enforcement actions against the former leading institutional sales trader at Knight Securities L.P. (now known as Knight Equity Markets L.P.).

The trader, Joseph Leighton, has been barred from the securities industry and will pay more than US$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 US$1.9 million in ill-gotten profits; prejudgment interest of more than US$660,000; an SEC civil penalty of US$750,000, and an NASD fine of US$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 the fraud.

In settling this matter with the NASD, Leighton neither admitted nor denied the charges, but consented to the entry of its findings. And, without admitting or denying the allegations in the SEC’s complaint, he consented to the SEC’s entry of its judgment and administrative order.

In December 2004, Knight paid more than US$79 million to settle SEC and NASD charges against the firm arising from Leighton’s conduct. More than US$66 million was paid into the Fair Fund. Also, in March, the NASD charged former Knight CEO Kenneth Pasternak and John Leighton, the former head of Knight’s Institutional Sales Desk (and Joseph Leighton’s brother), with supervisory violations. John Leighton and Pasternak are contesting the NASD charges.

The NASD says that from January 1999 to September 2000, Joseph Leighton was responsible for generating nearly US$135 million in trading profits for Knight – approximately 30% of the trading profits of Knight’s entire Institutional Sales Desk. But the NASD found and the SEC alleged that he generated approximately US$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.

It says that 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, he 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, he 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, he executed trades with customers based upon prices at an earlier time, which were more advantageous to Knight.

The NASD found that 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, it says.

‘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.”