A divided National Association of Securities Dealers hearing panel issued US$100,000 fines against two former executives from Knight Securities LP, for supervisory violations in connection with fraudulent sales to institutional customers in 1999 and 2000.

The fined executives are Kenneth Pasternak, former CEO of Knight Securities, (now known as Knight Equity Markets LP), and John Leighton, former head of the firm’s institutional sales desk. In addition to the fines, Pasternak was suspended in all supervisory capacities for two years, while Leighton was barred in all supervisory capacities.

In March 2005, the 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 two-to-one ruling, the panel found that they failed to supervise Joseph Leighton’s trading activities.

If the case is not appealed to the NASD’s National Adjudicatory Council, 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.

In April 2005, Joseph Leighton agreed to a bar from the securities industry and a payment of more than US$4 million to settle charges by the Securities and Exchange Commission and NASD, without admitting or denying the allegations. 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 US$79 million to settle SEC and NASD charges against the firm arising from these trades, also without admitting or denying the allegations.