Hedge Fund Chief Cleared Of Securities Fraud

Jun 13 2008 | 2:00am ET

Kenneth Pasternak, the founder of hedge fund Chestnut Ridge Capital, has been cleared of charges that he defrauded customers when he led the firm that became Knight Capital Group.

Pasternak, who co-founded Knight Trading Group, and John Leighton, who headed Knight’s institutional sales desk, were sued by the Securities and Exchange Commission in 2005 for allegedly turning a blind eye to Leighton’s brother Joseph’s overcharging institutional clients by millions on commissions.

According to the SEC, Pasternak, Leighton and others at Knight schemed to conceal from their institutional customers how their orders were worked in 1999 and 2000, failing to provide best execution and leading to profits far in excess of industry norms. The regulator also said that Pasternak and John Leighton knew or were reckless in not knowing about what Joseph Leighton was doing.

But, after a 14-day bench trial, a federal judge in Trenton, N.J., has ruled that the SEC failed to prove its case.

“I conclude that there is no evidence of any misconduct committed by Mr. Pasternak nor has there been any evidence of any misrepresentation or omission allegedly committed by Mr. Pasternak and I, therefore, conclude that he is no liable in a primary basis for a securities fraud,” U.S. District Judge Joel Pisano said.

“I am grateful to finally have been vindicated so completely,” Pasternak, who left Knight in 2002 to found Chestnut Ridge, said. “I am looking forward to returning the total of my focus to reengaging in the industry with my reputation fully restored.”

In 2004, Knight paid more than $79 million to settle SEC and NASD charges related to Joseph Leighton’s actions. Last year, the NASD fined Pasternak and John Leighton $100,000 each for supervisory violations.

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