Knight gets a paddled touche
I seriously doubt this was enough to make them blink twice but FWIW
How Knight Clients Failed to Recognize Questionable Trades
By ANN DAVIS
Staff Reporter of THE WALL STREET JOURNAL
December 17, 2004; Page C1
Knight Securities LP cheated big stock-trading clients "on thousands of occasions" over three years, regulators alleged yesterday in announcing that the brokerage house will pay $79 million in penalties to settle a long-running investigation.
The size of the settlement has been known for months, but the joint settlement pacts with the Securities and Exchange Commission and the National Association of Securities Dealers revealed new details about the breadth of alleged wrongdoing at the Jersey City, N.J., company, a unit of Knight Trading Group Inc. Regulators alleged that the traders routinely delayed filling clients' stock orders to trade for the firm's own account in 1999 and 2000 -- secretly pocketing commissions of several dollars a share, rather than the standard rate of pennies a share.
The NASD also accused Knight of failing to supervise "back books" -- accounts used by its traders to make speculative bets on stocks with the firm's money. Traders took home a greater share of the winnings in those accounts than when they executed trading orders for clients, "giving them greater incentive to generate profits in the back-book accounts," the NASD said.
The investigation and pending regulatory settlement of alleged improper trading at Knight were discussed in a page-one article in The Wall Street Journal yesterday. Knight agreed to the settlements without admitting or denying wrongdoing.
Knight's chief executive officer, Thomas M. Joyce, who joined in 2002 as part of a management overhaul, said the firm understands "that we have a responsibility to our clients to provide superior trade-execution services. We will continue to pursue our client-focused strategies." Yesterday, Knight's board announced Mr. Joyce's promotion to the additional post of chairman.
In July Knight had announced a settlement "in principle" with regulators, and said it would take a $79 million pretax charge to second-quarter earnings to cover penalties, profit disgorgement and interest. The traders at the center of the case are still under investigation. Yesterday, regulators formally detailed the breadth of the alleged wrongdoing and indicated why sophisticated institutional trading clients didn't spot the activity.
In one trade in March 2000, Knight made an average of $7 a share in profit with "effectively no risk to Knight," according to the SEC. In this instance, a client sought to sell 138,800 shares of E-Tek Dynamics -- and Knight took advantage, the SEC said.
Knight already owned some E-Tek shares. Instead of buying more from the customer, it aggressively sold that holding to others in the market, the SEC said. It then continued to sell E-Tek stock it didn't own -- but figured it could buy later -- at an average price of $239.51 a share, the SEC said. To cover its short position, it bought the customer's stock once prices went lower, to a range of $229 to $239. At one point, Knight purchased stock from its client at a profit of $19.72 a share, the SEC said.
Steve Luparello, an NASD market-regulation official, said significant price swings helped disguise self-dealing, since Knight had discretion to choose when to trade and at what price. "The broader the swings, the more ability they had to mislead," Mr. Luparello said in an interview. Knight misled investors about the timing of trades, misrepresenting execution times to pick a price it wanted to give the client and still lock in a big profit, regulators said.
The NASD cited another February 2000 trade where a customer sought to buy 80,000 shares of a Nasdaq Stock Market stock. Knight bought as many as 35,000 shares at prices ranging from $87 to $95, but didn't sell them back to the customer, the NASD said.
As the morning wore on, it continued to build its position until the stock was above $100. Then, when the stock dipped to $98, Knight executed its first trade to the customer at $95.625. The price appeared favorable to the prevailing price but the customer didn't realize Knight had done much better for itself earlier.
Paul Berger, the NASD's associate enforcement chief, said in an interview that "profits per share of $3, $6, $9 in this instance are clearly unreasonable, in a type of a trade where the typical profit per share at the time was three to 12 cents."
As part of the settlement, Knight agreed to retain an independent compliance consultant to review its trading policies, procedures and supervision. The company also will retain a consultant to distribute $41 million in alleged illegal profits.
