Knight Survives While Shareholders Pay (Update 1)

Updated with Knight Capital Group's announcement and early market action.

NEW YORK ( TheStreet) -- Shares of Knight Capital Group ( KCG) were down 26% in early trading on Monday, to $3.00, after the company secured $400 million in financing.

Knight Capital said in a Securities and Exchange Commission filing that an unnamed group of investors had "agreed to purchase an aggregate of $400 million of 2% convertible preferred stock," which "will be convertible into approximately 267 million shares of common stock of the Company."

That means the new investors will end up owning roughly 70% of Knight Capital's common shares, at a price of $1.50 a share.

The company later announced that the investment deal had been completed, and that the new financing -- provided by Jefferies Group ( JEF), Blackstone ( BX), Getco, Stephens, Stifel Financial ( SF) and TD Ameritrade ( AMTD) -- would "allow Knight to resume normal operations immediately."

Knight Capital also said it had "committed to expand its Board of Directors by adding three new members."

Knight CEO Thomas Joyce said that "the array of participants in this capital infusion underscores Knight's critical role in the capital markets. With our financial position strengthened and liquidity restored, we will continue to provide clients with trading in a broad range of securities, high-quality execution and outstanding client service."

Shares of the Jersey City, N.J., market maker and facilitator of electronic transactions for wholesale trading clients announced dropped 63% on Thursday, after Knight Capital announced a pretax loss of $440 million, after glitches in its trading software on Wednesday "sent into the market a ton of orders, all erroneous, so we ended up with a large error position which we had to sort through the balance of the day," according to Knight Capital CEO Thomas Joyce, who was interviewed on Bloomberg TV.

After seeing its shares drop 33% last Wednesday after an early trading glitch, followed by a 63% plunge on Thursday, after announcing a pretax loss of $440 million from its efforts close-out its erroneous trades, Knight Capital's shares bounced back 57% on Friday, to close at $4.05, after the company secured a credit line allowing it to continue operating for another day.

Knight Capital in June renewed a $200 million credit line with a group of banks led by U.S. Bancorp ( USB) subsidiary U.S. Bank, NA, that also included bank subsidiaries of Bank of America ( BAC), Bank of Montreal ( BMO), and JPMorgan Chase ( JPM).

Among the covenants of the credit agreement was a requirement that Knight maintain certain levels of capital for its broker-dealer subsidiaries, which the company might have been unable to meet, following the three-day settlement of its erroneous trades, without securing additional capital from outside.

On Wednesday, as Knight attempted to work its way through the erroneous trading positions caused by the software glitch, SEC Chairman Mary Schapiro rejected Knight Capital CEO Thomas Joyce's request to allow the firm to cancel many of the trades, which left it holding "at least $4.5 billion worth of securities it hadn't planned to buy," according to a Wall Street Journal report. The Journal also reported that Goldman Sachs ( GS) stepped in to buy the unwanted securities from Knight to escape the erroneous trading positions and announce the $440 million loss.

The New York Stock Exchange announced earlier on Monday that it had "temporarily assigned custodial responsibility for approximately 524 New York Stock Exchange (NYSE) and 156 NYSE MKT listed securities" from Knight Capital Group to Getco, and that the temporarily re-assigned market-making responsibilities would be returned to Knight "in a timely manner," upon Knight's "completion and approval of a recapitalization plan."

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-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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