Ex-Knight CEO Pasternak Named in NASD Complaint

The allegations pertain to fraudulent trading by an ex-employee.
By Matthew Goldstein ,

Regulators charged the former chief executive of

Knight Trading

(NITE)

with failing to supervise a former top institutional trader who made tens of millions of dollars in fraudulent trades.

The NASD charged Kenneth Pasternak, who left Knight in 2002, with failing to "establish, maintain or enforce a system or procedures" that would have prevented the infractions. The former trader generated at least $54 million in ill-gotten profits, the NASD said.

Pasternak, who no longer works in the brokerage business, had briefly considered running for Congress after leaving the Jersey City, N.J., firm.

Last December, Knight, the big

Nasdaq Stock Market

trade execution firm, paid $79 million in fines and restitution to settle a

Securities and Exchange Commission

investigation into the incident. The investigation found many instances in which the former Knight trader had been involved with front-running trades placed by the firm's institutional customers, including several big mutual fund families.

Front-running is an illegal practice in which a trader with knowledge of another investor's intentions uses that information to generate a profit at the expense of the other investor.

The NASD also charged the former trader's brother, John Leighton, a senior vice president at Knight. Leighton ran the firm's institutional trading desk before resigning in November 2000. Leighton supervised his brother and, under a deal approved by Pasternak, received half of his brother's trading compensation.

The NASD charges were included in a disciplinary complaint, which will be heard by an NASD hearing officer. If the charges are upheld, Pasternak and Leighton could be sanctioned and forced to disgorge any ill-gotten gains.

From January 1999 to September 2000, the period during which the illegal trading took place, Leighton's brother generated $135 million in trading profits, nearly a third of the institutional sales desks' entire profits. The NASD charged that Leighton "received millions of dollars'' from this unusual arrangement with his brother.

The NASD did not identify Leighton's brother by name, but

TheStreet.com

has reported previously that the alleged rogue trader was Joseph Leighton, who left Knight around the same time as his brother John. Joseph Leighton had been a trader at

Jefferies & Co.

(JEF) - Get Report

up until last December.

Last March, both the NASD and the SEC notified Joseph Leighton that the regulatory agencies were considering filing civil charges against him. The SEC had sent similar notices to John Leighton and Pasternak.

An SEC spokesman had no comment on the investigation.

News of the potential SEC action forced John Leighton to take a leave of absence from his job as chief executive of

Crown Financial

, a small Nasdaq trading firm. He joined that firm about a year after leaving Knight.

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