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U.S. Securities and Exchange Commission

Michael K. Lowman (MKL 8983)
Paul R. Berger
Russell G. Ryan
Derek M. Meisner
Samuel J. Draddy (SJD 9806)
Attorneys for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549-0806
(202) 942-7253 (Lowman)
(202) 942-9569 (Lowman fax)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY


SECURITIES AND EXCHANGE COMMISSION,
450 Fifth Street, N.W.
Washington, DC 20549-0806,

Plaintiff,   

v.

BRIAN P. DELANEY
3048 Gates Court
Morris Planes, N.J. 07950,

NICOLE M. SHKEDI
20 Birmingham Drive
Manalapan, N.J. 07726,

and

THOMAS J. DONOVAN
340 80th Street
Brooklyn, N.Y. 11209,

Defendants.   


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Civil Action No.

COMPLAINT

Plaintiff Securities and Exchange Commission (the "Commission") for its complaint against defendants Brian P. Delaney, Nicole M. Shkedi and Thomas J. Donovan alleges as follows:

SUMMARY

1. This case arises from a fraudulent trading scheme carried out by defendants Delaney, Shkedi, and Donovan, all of whom were formerly employed as equity traders at Knight Securities, L.P. As described below, from at least March 2001 through February 2002, the defendants abused their positions at Knight by knowingly and intentionally executing fraudulent stock trades from the Knight proprietary accounts they controlled at prices guaranteed to generate profits in private brokerage accounts that they also controlled. In all, the defendants defrauded Knight of approximately $1.4 million.

2. By engaging in this conduct, the defendants committed securities fraud in violation of Section 17(a) of the Securities Act of 1933 (the "Securities Act") [15 U.S.C. § 77q(a)], Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") [15 U.S.C. § 78j(b)], and Exchange Act Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]. Unless enjoined, they are likely to engage in similar conduct in the future.

JURISDICTION

3. This Court has jurisdiction pursuant to Securities Act Sections 20 and 22 [15 U.S.C. §§ 77t and 77v] and Exchange Act Sections 21(d) and 27 [15 U.S.C. §§ 78u(d) and 78aa]. The defendants, directly or indirectly, each used the means or instrumentalities of interstate commerce or the mails, or the facilities of a national securities exchange, in connection with the transactions, acts, practices, and courses of business described herein.

DEFENDANTS

4. Brian P. Delaney, age 31, was an equity trader at Knight from 1996 until Knight terminated his employment in March 2002. He is not currently associated with any regulated entity.

5. Nicole M. Shkedi, age 27, was an equity trader at Knight from 1998 until Knight terminated her employment in March 2002. At all relevant times, she held a Series 7 general securities license. She is not currently associated with any regulated entity.

6. Thomas J. Donovan, age 35, was an equity trader at Knight from 1996 until he resigned in September 2001. At all relevant times, he held a Series 7 general securities license. After leaving Knight, Donovan worked as a registered representative for another registered broker-dealer from November 2001 through February 2002. He is not currently associated with any regulated entity.

FACTS

7. Knight is a registered broker-dealer headquartered in Jersey City, New Jersey. Knight is a subsidiary of Knight Trading Group, Inc., a Delaware corporation also headquartered in Jersey City, New Jersey. The common stock of Knight Trading Group, Inc. is registered with the Commission pursuant to Exchange Act Section 12(g) [15 U.S.C. § 78l] and trades on the Nasdaq National Market.

8. As a Nasdaq market maker, Knight buys and sells Nasdaq securities for its own account and commits capital by taking the counter-side of individual investor trade orders. Many retail brokerage firms route their customers' individual orders to Knight for execution, and some send a vast majority of their order flow to Knight.

9. Equity traders employed by Knight are responsible for executing these orders on Knight's behalf. Traders at Knight typically are assigned responsibility for trading in specific securities, with all trades executed on Knight's behalf in those particular securities being done by the equity trader assigned to that security.

10. Defendants Delaney, Shkedi and Donovan were all employed by Knight as equity traders responsible for making markets in specific equity securities. As equity traders, the defendants had discretionary trading authority over Knight trading accounts maintained for the purpose of carrying out Knight's business as a market maker in these specific stocks.

11. On or about March 5, 2001, Delaney caused a friend and business partner to open a brokerage account at E*TRADE Securities LLC ("E*TRADE"), an on-line retail brokerage firm that directs the vast majority of its customer orders to Knight for execution. Delaney's friend nominally owned the E*TRADE account, but Delaney and Donovan placed all of the trades in the account and otherwise exercised control over it.

12. Shortly after the E*TRADE account was opened, Delaney and Donovan began placing orders in the E*TRADE account to purchase and sell specific thinly-traded securities for which Delaney and Donovan were responsible for executing trades in Knight's proprietary accounts. Delaney and Donovan typically used electronic means, such as a Palm Pilot, to place the orders in the E*TRADE account in order to avoid detection of the fraud. As equity traders for Knight in those securities, Delaney and Donovan knew that the orders they placed in the E*TRADE account would be routed for execution to Knight, and specifically to either Delaney or Donovan.

13. Delaney and Donovan knowingly and intentionally caused Knight to repeatedly purchase and sell securities to the E*TRADE account at artificial prices that guaranteed profits for the E*TRADE account at Knight's expense. For example, Delaney and Donovan sold securities from Knight's proprietary accounts to the E*TRADE account at prices that were less than their fair market value and, shortly thereafter, repurchased the same securities from the E*TRADE account into Knight's proprietary accounts at prices that were higher than their fair market value. Likewise, Delaney and Donovan engaged in trades without regard to the spread between the bid and the ask prices of a security. They sold from Knight's account at the bid amount (lowest quoted price of the day) and sold back to Knight at the ask price (the highest price quoted for the day). Specific examples of Donovan's and Delaney's trades with the E*TRADE account are below:

Example 1: Donovan Trades with the E*TRADE Account

DATE

TIME

B/S

QTY

SYMBOL

PRICE

BID

ASK

8/15/01

3:58 pm

Sell

(8,000)

CFCM

2.00*

2.02

2.19

8/15/01

3:58 pm

Sell

(22,000)

CFCM

2.00*

2.02

2.19

8/16/01

4:00 pm

Buy

15,000

CFCM

3.40*

3.00

3.10

8/16/01

3:59 pm

Buy

15,000

CFCM

2.95*

2.75

2.84

*Illegal Profit/Knight's Loss on 8/15-8/16 trades: $35,250.00

Example 2: Delaney Trades with the E*TRADE Account

DATE

TIME

B/S

QTY

SYMBOL

PRICE

BID

ASK

9/18/01

3:53 pm

Sell

(50,000)

NSAT

0.80*

1.03

1.10

9/21/01

10:26am

Buy

25,000

NSAT

1.18*

1.11

1.18

9/21/01

10:27am

Buy

25,000

NSAT

1.20*

1.11

1.20

*Illegal Profit/Knight's Loss on 9/18 and 9/21 trades: $19,500.00

14. Between March 2001 and October 2001, Delaney and Donovan executed at least 17 fraudulent trades with the E*TRADE Account, resulting in an average profit per trade to the E*TRADE account of $30,383.67 and a total of $516,522.40 in illegal profits.

15. In September 2001, before the trading scheme became known to Knight, Donovan resigned from Knight. At or around that time, Delaney recruited his girlfriend and fellow trader, defendant Shkedi, to participate in the fraudulent scheme. In furtherance of the scheme, Donovan opened two E*TRADE accounts in his own name in October 2001 and January 2002. Thereafter, Delaney and Shkedi electronically placed orders in Donovan's accounts, which were then routed to Delaney and Shkedi, the two Knight employees responsible for executing orders in the securities at issue. Delaney and Shkedi then executed the orders at prices highly favorable to Donovan's account, at Knight's expense.

16. Between October 2001 and February 2002, Delaney and Shkedi executed at least 87 fraudulent trades with Donovan's two E*TRADE accounts, resulting in an average profit per trade to Donovan's accounts of $10,212.15 and a total of $888,457.00 in illegal profits. Specific examples of Shkedi's and Delaney's trades with Donovan's E*TRADE account are below:

Example 3: Shkedi Trades with Donovan's E-Trade Account

DATE

TIME

B/S

QTY

SYMBOL

PRICE

BID

ASK

1/15/02

12:42pm

Sell

(5,000)

GRIF

13.40*

13.41

14.25

1/15/02

12:42pm

Sell

(5,000)

GRIF

13.40*

13.41

14.25

1/16/02

2:15 pm

Buy

6,000

GRIF

16.20*

14.05

16.20

1/16/02

2:15 pm

Buy

4,000

GRIF

16.25*

14.05

16.25

*Illegal Profit/Knight's Loss on 1/15-1/16 trades: $28,200.00.

Example 4: Delaney Trades with Donovan's E-Trade Account

DATE

TIME

B/S

QTY

SYMBOL

PRICE

BID

ASK

1/24/02

2:34 pm

Sell

(9,500)

CADA

4.30*

4.30

4.42

1/24/02

3:37 pm

Sell

(8,000)

CADA

4.30*

4.30

4.42

1/24/02

3:37 pm

Sell

(7,500)

CADA

4.30*

4.30

4.42

1/25/02

9:36 am

Buy

13,000

CADA

4.93*

4.57

4.94

1/25/02

9:36 am

Buy

12,000

CADA

4.94*

4.57

4.94

*Illegal Profit/Knight's Loss on 1/24-1/25 trades: $15,780.00

17. In February 2002, Knight discovered the scheme and terminated the employment of both Delaney and Shkedi.

FIRST CLAIM FOR RELIEF

(FRAUD IN CONNECTION WITH THE PURCHASE
OR SALE OF SECURITIES)

Violations of Exchange Act Section 10(b) [15 U.S.C. § 78j(b)]
and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5]

18. Paragraphs 1 through 17 are realleged and incorporated by reference.

19. By engaging in the fraudulent trading scheme described above and by using the mails or other instrumentalities of interstate commerce to employ a scheme to commit fraud in connection with the purchase or sale of securities, defendants Delaney, Shkedi and Donovan violated Exchange Act Section 10(b) [15 U.S.C. § 78j(b)] and Exchange Act Rule 10b-5 [17 C.F.R. § 240.10b-5].

SECOND CLAIM FOR RELIEF

(FRAUD IN THE OFFER OR SALE OF SECURITIES)

Violations of Securities Act Section 17(a) [15 U.S.C. § 77q(a)]

20. Paragraphs 1 through 19 are realleged and incorporated by reference.

21. By virtue of the conduct described herein and by using the mails or other instruments of interstate commerce to employ a scheme to defraud in the offer or sale of securities, defendants Brian Delaney, Nicole Shkedi and Thomas Donovan violated Securities Act Section 17(a) [15 U.S.C. § 77q(a)].

PRAYER FOR RELIEF

WHEREFORE, plaintiff respectfully requests that this Court enter a Final Judgment:

I.

Permanently enjoining, pursuant to Securities Act Section 20(b) [15 U.S.C. § 77t(b)] and Exchange Act Section 21(d)(1) [15 U.S.C. § 78u(d)(1)], defendants Delaney, Shkedi and Donovan from violating, directly or indirectly, Section 17(a) of the Securities Act [15 U.S.C. § 77q(a)], Section 10(b) of the Exchange Act [15 U.S.C. § 78j(b)], and Rule 10b-5 of the Exchange Act [17 C.F.R. § 240.10b-5];

II.

Ordering defendants Delaney, Shkedi and Donovan to pay civil penalties pursuant to Securities Act Section 20(d) [15 U.S.C. § 77t(d)] and Exchange Act Section 21(d)(3) [15 U.S.C. § 78u(d)(3)];

III.

Ordering defendant Donovan to disgorge, with prejudgment interest, the amount by which he was unjustly enriched as a result of his participation in the fraudulent scheme described above;

IV.

Granting such other relief as the Court deems appropriate; and

V.

Retaining jurisdiction of this action in accordance with the principles of equity and the Federal Rules of Civil Procedure in order to implement and carry out the terms of all orders and decrees or to entertain any suitable application or motion for additional relief within the jurisdiction of this Court.

Respectfully submitted,

_____________________________
Michael K. Lowman (MKL 8983)
Paul R. Berger
Russell G. Ryan
Derek M. Meisner
Samuel J. Draddy (SJD 9806)
Attorneys for Plaintiff
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549-0806
(202) 942-7253 (Lowman)
(202) 942-9569 (Lowman fax)

LOCAL COUNSEL:
Michael A. Chageres, Esq.
Chief of Civil Division
Assistant United States Attorney
Office of the United States Attorney
District of New Jersey
970 Broad Street
Suite 700
Newark, NJ 07101
(973) 645-2839

 

http://www.sec.gov/litigation/complaints/comp18329.htm


Modified: 09/08/2003