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The Glaring Chink In Knight's Ipo

Inside Wall Street


An impending $180 million public offering of Knight/Trimark Group has all the earmarks of a hot IPO. Underwritten by BancAmerica Robertson Stephens and other classy firms, the deal will bring public the holding company for Knight Securities in Jersey City, N.J. Handling almost 10% of trading on the NASDAQ and over-the-counter markets--twice its market share a year ago (chart)--Knight has supplanted Herzog, Heine, Geduld as the NASDAQ king in just the past few months. It is also a rising star in "third market" trading of listed stocks.

But there's a time bomb in the prospectus: Knight CEO Kenneth Pasternak is in hot water with the Securities & Exchange Commission--not from anything at Knight, but because of alleged activities of subordinates at his former employer, Troster Singer, a unit of Spear, Leeds & Kellogg.

Pasternak's woes stem from the SEC's probe of alleged collusion among NASDAQ market makers. According to the prospectus, the SEC staff has told Knight that it intends to recommend to the agency that Pasternak be suspended for six months and assessed a civil penalty of $50,000 for "failure to supervise with respect to several transactions of other traders under his supervision at Troster Singer." Spear Leeds was one of 24 firms that settled antitrust charges with the Justice Dept. in July, 1996, without admitting wrongdoing, but the SEC's investigation of the firms and their traders has continued. Knight was not targeted or charged by the Justice Dept.

Pasternak, who was at Spear Leeds from 1979 to 1994, "intends to vigorously defend himself" against any charges that may be brought, the prospectus notes. Pasternak declined further comment, as did Carl Hewitt, the Spear Leeds general counsel. One person close to the investigation notes that the recommended six-month suspension--a severe penalty--could merely represent a hardball bargaining position by the SEC. But if the agency sticks to its guns, the consequences could hurt Knight. Suspension of Pasternak, who has a reputation as a crackerjack trader, "would have a material adverse effect on the company's business, financial condition, and operating results," says the prospectus.BY GARY WEISSReturn to top

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