## Facts

- The SEC brought a civil enforcement action against Kenneth D. Pasternak (CEO of Knight Securities, L.P., a registered broker-dealer and NASDAQ market maker) and John P. Leighton (head of Knight’s institutional sales desk).
- The SEC’s claims were based on trading by Joseph Leighton (an institutional sales trader supervised by John Leighton), who was not a defendant in the action.
- The challenged conduct involved 42 institutional trades in NASDAQ stocks during 1999–2000, a highly volatile period.
- Knight handled institutional “not-held” orders, where customers provided parameters and could monitor, modify, or cancel orders while execution was being worked.
- The SEC alleged Joseph Leighton took proprietary positions, delayed executions, and failed to provide best execution, characterizing the conduct as improper front-running and concealment of profits/mark-ups, including through alleged misuse of NASDAQ ACT reporting modifiers.
- The SEC further alleged Pasternak and John Leighton made misrepresentations about “best execution,” omitted material information about pricing/mark-ups, and failed to supervise adequately.
- At a non-jury trial, institutional customer testimony reflected ongoing communication, market monitoring, satisfaction with execution quality, and an absence of contemporaneous complaints.
- Evidence showed some dissatisfied trades were adjusted in customers’ favor and that certain retail-order execution errors could reduce inventory and increase Knight’s costs to fill institutional orders, which the court viewed as inconsistent with a deliberate scheme to disadvantage institutional clients.

## Issues

1. Whether the SEC proved an underlying securities-law fraud violation arising from Joseph Leighton’s execution, pricing, profits, alleged front-running, or trade-reporting practices.
2. Whether Pasternak or John Leighton were primary antifraud violators through material misstatements or omissions concerning best execution or execution pricing.
3. Whether Pasternak or John Leighton aided and abetted any primary violation with the required knowledge/scienter and substantial assistance.
4. Whether Pasternak or John Leighton were liable as control persons under Exchange Act § 20(a) based on control of a primary violator and culpable participation or lack of good faith.

## Decision

- Following a bench trial and consideration of defendants’ Rule 52(c) motion, the court entered judgment for Pasternak and John Leighton on all claims.
- The court found the SEC failed to prove Joseph Leighton committed any securities-law violation in connection with the 42 trades.
- Because no primary violation was proven, the court held aiding-and-abetting and control-person theories could not succeed.
- The court also found the SEC failed to establish that Pasternak or John Leighton made material misstatements or omissions, acted with scienter, or provided substantial assistance to any fraud.
- Requests for injunctive and other relief were denied.

## Legal Principles

- In an SEC civil enforcement action, the SEC bears the burden to prove violations by a preponderance of the evidence; antifraud claims under Exchange Act § 10(b) and Rule 10b-5 require scienter (intent to deceive, manipulate, or defraud, or severe recklessness).
- Large trading profits or wide spreads by a market maker, without proof of deception or a materially misleading statement or omission, do not by themselves establish securities fraud.
- Best-execution theories require proof that executions were deceptive or materially misleading in context; generalized statements about seeking best execution are not actionable absent a showing of material falsity and scienter.
- Aiding-and-abetting liability requires a primary violation, knowledge (or comparable scienter), and substantial assistance.
- Control-person liability under Exchange Act § 20(a) requires a primary violation and a basis to attribute culpability to the controlling person (including absence of good faith or culpable participation, as applicable).

## Conclusion

The court rejected the SEC’s attempt to treat disputed market-making execution outcomes, profits, and reporting mechanics as fraud, holding the evidence did not show deceptive trading, material misstatements or omissions, or scienter, and therefore supported neither primary liability nor derivative aiding-and-abetting or control-person liability.


Sec. & Exch. Comm’n v. Pasternak, 561 F. Supp. 2d 459 (D.N.J. 2008)