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U.S. Securities and Exchange Commission

U.S. SECURITIES AND EXCHANGE COMMISSION

Litigation Release No. 19193 / April 20, 2005

SECURITIES AND EXCHANGE COMMISSION v. JOSEPH W. LEIGHTON, No. 05-2050 (JAP) (D.N.J.)

SEC SUES FORMER KNIGHT SECURITIES INSTITUTIONAL SALES TRADER FOR FRAUD

JOSEPH W. LEIGHTON PAYS OVER $4 MILLION TO SETTLE FRAUD CHARGES WITH SEC AND NASD

The Securities and Exchange Commission filed a complaint today in the United States District Court for the District of New Jersey against Joseph W. Leighton ("Leighton"), a former institutional sales trader at Knight Securities, L.P., now known as Knight Equity Markets, L.P. ("Knight"), for engaging in a pattern of deceptive trading that defrauded Knight's institutional customers. The complaint alleges that Leighton filled (or "worked") certain institutional orders in a manner that generated excessively high profits for the firm in violation of Knight's duty to provide "best execution" for orders placed by the firm's customers. Without admitting or denying the allegations in the Commission's complaint, Leighton has consented to pay $1,939,264 in disgorgement, $660,282.78 in prejudgment interest thereon and $750,000 in civil penalties. Leighton simultaneously resolved a parallel action with the NASD in which he will pay a fine of $750,000.

In addition, Leighton consented to the entry of a final judgment enjoining him from further violations of Section 17(a) of the Securities Act of 1933 ("Securities Act"), Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rule 10b-5. In a separate administrative action, Leighton consented to the entry of an administrative order by the Commission, without admitting or denying the findings therein, that will permanently bar him from association with any broker or dealer.

The Commission's complaint against Leighton includes the following allegations:

  • From January 1999 through November 2000, Leighton, in connection with orders handled by him and others at Knight, engaged in a pattern of fraud by trading for Knight's institutional customers in a manner that involved effectively no risk to Knight for the purpose of deceptively generating excessively high profits. By working "not held" orders in a manner designed to yield the greatest possible profits, Leighton failed to provide "best execution" for orders placed by Knight's institutional customers.
     
  • Leighton engaged in fraud for the purpose of improperly generating excessive profits in the following manner: after receipt of the institutional orders, but prior to executing the orders, Leighton had Knight's market makers acquire long or short positions in the market pursuant to the customer's order. In numerous instances where the market was moving in a favorable direction in relation to the value of Knight's position in the stock, Leighton executed relatively small portions of the position to the customer, while retaining the rest of the position. Leighton delayed executing the customer's order -- ultimately filling the order at prices substantially greater than Knight's own costs. For example, Leighton and Knight realized average profits per share in excess of $2.00 on numerous transactions -- and in one instance even realized average profits as high as $9.63 per share -- while working not-held orders in a manner that involved effectively no risk to Knight. By trading in this manner, Leighton maximized the firm's profit at the expense of Knight's institutional customers.
     
  • In numerous instances where the market was moving in an unfavorable direction in relation to Knight's position in the stock, Leighton reduced Knight's position by executing its remaining positions in the order to the customer at prices at which Knight still generated a profit -- thereby limiting the risk that the firm would incur losses on the execution of a customer's order.
     
  • In numerous instances in which the market moved so unfavorably that the position Knight acquired to fill the order had declined in value, Leighton and others at Knight improperly used trade modifiers to report the transaction to the Automated Confirmation Transaction Service ("ACT"). Leighton and others at Knight manually entered a fabricated execution time for the transaction that indicated that the execution occurred earlier in the day -- a time when the trade would have been profitable to Knight. The misuse of ACT trade modifiers resulted in inaccurate and untimely reporting of its trades to ACT, compromised the ability of Knight's customers to determine the quality of the executions they were receiving, and allowed Leighton to circumvent limit order protection protocols at Knight to improperly fill more lucrative institutional orders before customer retail limit orders.
     

The Commission's complaint alleges that by engaging in these trading practices, Leighton defrauded Knight's institutional customers by depriving them of "best execution" in connection with hundreds of institutional orders. Consequently, the complaint alleges, Leighton and the firm improperly realized tens of millions of dollars in excessive per share profits from its institutional customers. Accordingly, Leighton violated Section 17(a) of the Exchange Act and Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5.

In the NASD proceeding, the NASD found Leighton violated Section 10(b) of the Exchange Act and Exchange Act Rule 10b-5, and NASD Conduct Rules 2110 and 2120, by intentionally employing a scheme to defraud, engaging in a course of business that operated as a fraud on institutional customers of Knight, and employing deceptive and fraudulent devices in connection with the purchase and sale of securities to Knight's institutional customers. Leighton agreed to settle the NASD's parallel proceeding without admitting or denying the NASD's findings or allegations.

In December 2004, the Commission and the NASD brought settled enforcement actions against Knight. The enforcement actions resulted in payments of over $79 million in disgorgement, civil penalties and fines. In Knight's settlement with the Commission, the firm consented to the issuance of an administrative order, without admitting or denying the findings therein, that found that Knight (i) willfully violated the broker-dealer antifraud provisions of the Exchange Act (Section 15(c)(1)(A)) and multiple provisions of the books and records provisions of the Exchange Act (Exchange Act Section 17(a) and Rules 17a-3(a)(1), 17a-3(a)(7), 17a-4(b)(1) and 17a-4(b)(4) thereunder), and (ii) failed reasonably to supervise pursuant to Section 15(b)(4)(E) of the Exchange Act with a view to preventing violations of Sections 15(c)(1) and 17(a) of the Exchange Act and Rule 17a-3(a)(1) thereunder. For further information, see In the Matter of Knight Securities, L.P., Securities Exchange Act of 1934 Rel. No. 50867 (December 16, 2004).

The Commission's investigation is continuing.

SEC Complaint in this matter


http://www.sec.gov/litigation/litreleases/lr19193.htm


Modified:04/20/2005