Knight's Saga: A Court Rejects the SEC's Theory of “Best Execution”

2009  |  The Review of Securities & Commodities Regulation 2009

Securities traders are obligated to provide “best execution” to their customers. Knight Securities, a public market making firm, settled charges with the SEC alleging a scheme to overcharge its customers on large securities trades. In SEC v. Pasternak and Leighton, the SEC charged two former executives of Knight with overseeing a scheme to overcharge customers and make excessive profits on numerous institutional orders to buy and sell large blocks of stock, thereby failing to provide best execution. In a recent opinion, the district court rejected the SEC’s charges, holding that the SEC had failed to formulate a viable legal theory, much less prove a violation of the securities laws. The ruling not only clarifies issues surrounding “best execution”; it also underscores the difficulty that companies have, in the present environment, of challenging government claims of wrongdoing.

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