KCG Holdings Inc., the company formed when Getco LLC bought Knight Capital Group Inc., restated third-quarter earnings to correct its accounting related to the acquisition.
KCG reported a one-time gain of $128 million after reclassifying how it recognized changes in Getco’s investment in Knight, according to a statement from the Jersey City, New Jersey-based firm yesterday. The adjustment increased third-quarter net income to $226.8 million, or $1.98 a share, more than double its previously announced profit. The company also separately revised Getco’s financial statements for the past three years. It said there were “material weaknesses” in how Getco prepared its financial statements.
Getco and five other financial companies received Knight preferred shares in August 2012 as part of a deal to rescue the market maker after it spewed erroneous orders that caused more than $460 million in losses. Chicago-based Getco agreed to the merger as dwindling equity volume pressured its own market-making business, prompting a 90 percent drop in 2012 net income.
“Clearly, there were problems with accounting processes and controls with legacy Getco,” Richard Repetto, a New York-based analyst at Sandler O’Neill & Partners LP, wrote in a note today. “With KCG CFO Steve Bisgay and his team taking over the finance functions of the new combined company, we expect the accounting standards to be brought up to the public company reporting bar.”
The shares fell 1.1 percent to $9.93 at 12:16 p.m. New York time. They’ve dropped 5.4 percent since June 28, the day before the merger was completed, compared with a 10 percent rise in the Standard & Poor’s 500 Index.
KCG said Getco previously held its investment in Knight at fair value and classified the gains as other comprehensive income within the equity statement. The company has now recognized the gains on the income statement, according to the press release.
Getco had errors in the presentation of members’ equity, earnings per unit, cash flow and an accounting charge related to non-cash, merger-related compensation, the company said.
“There were material weaknesses in Getco’s financial statement preparation processes and the related disclosure controls for each of the affected periods,” according to the statement.
KCG had reported on Oct. 30 that net income for the third quarter was $98.9 million, or 86 cents a share, including a one-time tax benefit of $103.5 million.
Securities regulators last month fined Knight Capital Americas LLC $12 million for the trading malfunction that roiled the U.S. stock market in August 2012, saying the firm ignored dozens of error messages before its computers bombarded exchanges with millions of unintended orders.