SRZ Client Kenneth D. Pasternak Cleared of All Alleged Wrongdoing
March 4, 2010
Schulte Roth & Zabel client Kenneth D. Pasternak, the former CEO and Chairman of Knight Trading Group, the largest Nasdaq market-making firm, was fully exonerated by the National Adjudicatory Council (NAC) of the Financial Industry Regulatory Authority (FINRA) when, on March 3, NAC issued an unprecedented reversal vacating an erroneous decision by a FINRA hearing panel and dismissing all claims against Mr. Pasternak.
FINRA’s Department of Market Regulation in March 2005 filed a complaint against Mr. Pasternak and John Leighton, former head of the firm's Institutional Sales Desk, claiming “failure to supervise” in connection with alleged fraudulent sales to institutional customers. Shortly thereafter, the Securities and Exchange Commission (SEC) brought a parallel proceeding against the two men in the U.S. District Court for the District of New Jersey.
In April 2007, a FINRA hearing panel, following a 12-day hearing, issued a 2-1 decision holding Mr. Pasternak and his co-respondent liable for “failure to supervise” in violation of FINRA Rules 3010 and 2110. The decision included a vociferous dissent that noted, among other things, that there was not a “scintilla of evidence” to support a finding of liability against the respondents and that “Mr. Pasternak fulfilled his supervisory obligations.”
Howard Schiffman, the SRZ litigation partner who represented Mr. Pasternak at the hearing, filed an immediate appeal from the decision. While the appeal was pending, the SEC case was heard by the U.S. District Court Judge Joel A. Pisano. After a 14-day bench trial at which Mr. Pasternak was represented by Mr. Schiffman, Judge Pisano on June 24, 2008, issued an opinion overwhelmingly in favor of the defendants, dismissing the SEC action against them and noting that “[the evidence] utterly, utterly refute[d] the SEC’s theory of the case.” With the NAC ruling, says Mr. Schiffman, “Mr. Pasternak has now been fully cleared of any wrongdoing, first by the federal court and now again by the NAC, which yesterday dismissed all claims against him. This decision once again confirms that Mr. Pasternak at all times acted as a diligent and responsible CEO of one of Wall Street’s leading firms and finally brings to a close Mr. Pasternak’s seven-year ordeal. It was only his tenacity and unique ability to fight FINRA’s and the SEC’s baseless allegations that enabled him to obtain this welcome, although long overdue, exoneration. During that time, and despite his now confirmed innocence, Mr. Pasternak, while an active private investor, was effectively and unjustly precluded from fully participating in the public arena.”
In its lengthy decision completely exonerating Mr. Pasternak and Mr. Leighton, the NAC rejected “each of [FINRA’s] fraud theories” and found that none of Mr. Leighton’s trading activities “were in any manner undertaken in bad faith or exhibited unethical conduct.” The NAC further found that Mr. Pasternak reasonably supervised Mr. Leighton and did not engage in any wrongdoing. To the contrary, Mr. Pasternak “relied justifiably upon a comprehensive supervisory infrastructure that was designed and regularly overseen by Knight’s compliance and legal departments. The firm, with the support of Pasternak, maintained compliance protocols and written supervisory procedures reasonably designed to monitor and detect wrongdoing by the firm’s market makers and institutional sales traders” and found that “Pasternak at all times also sought to require Joseph Leighton and all other institutional sales traders to act in compliance with the federal securities laws and FINRA rules.” In sum, the NAC found that Mr. Pasternak’s conduct “was reasonable and did not constitute a violation.”
“I am relieved that this matter has finally been resolved and my name cleared after so many years,” Mr. Pasternak said. “I look forward to reengaging fully with the industry and carrying on my career uninhibited by these false and unwarranted accusations.”
In addition to Mr. Schiffman, SRZ litigation special counsel James M. Wines and associate Christopher M. McLean worked on the matter.