Securities and Exchange Commission v. Pasternak

Kenneth Pasternak (defendant) was CEO and board chairman of Knight Securities, L.P. (Knight). John Leighton (defendant) headed Knight’s institutional-sales desk. John’s brother Joseph was a Knight institutional-sales trader. The Securities and Exchange Commission (SEC) (plaintiff) filed a complaint, alleging that with respect to 42 trades, Joseph took positions in securities ordered by institutional customers, delayed executing customers’ orders to generate improper profits, and failed to provide best execution; Joseph’s trading practices amounted to improper front-running; and John and Pasternak participated in the fraud by representing that Knight provided best execution and not disclosing how Joseph priced executions. After a non-jury trial, John and Pasternak moved for judgment. The court found: institutional customers gave traders not-held orders with instructions on how to work them, price parameters, and size; traders gave customers feedback as orders were executed; customers monitored the marketplace and could modify or cancel orders; on not-held orders, Knight acquired shares at one price, executed to customers at another price, and kept the difference as profit; dissatisfied customers were given what traders believed were fair prices, causing Knight to lose money; a technical error caused Knight’s automatic execution of individuals’ retail orders to exceed set volumes, which could deplete the inventory acquired to fill institutional orders and require that Knight pay to acquire positions to fill institutional orders; Joseph’s customers monitored the market and gave Joseph instructions throughout transactions, believed Joseph provided the best prices and volumes given instructions and market conditions, and never complained about Joseph’s trading; and the trades identified by the SEC occurred in an unusually volatile market amid the internet bubble and investment democratization.