Knight Capital Group, Inc.

Case Details

Class Period: May 10, 2011 - August 1, 2012
Date Filed: October 26, 2012
Case Number: 2:12-cv-06760
Jurisdiction: District of New Jersey
icon-casetype Case Type: Securities Case

Case Summary

The Complaint brought forth claims for violations of the Securities Exchange Act of 1934 against Knight Capital Group, Inc., and certain of its senior executives. The Complaint alleged that Defendants made false and/or misleading statements, as well as failed to disclose material adverse facts about the Company’s business, operations, and prospects on behalf of all persons or entities that purchased or otherwise acquired Knight securities during the class period.

Knight is a global financial services firm that provides access to the capital markets across multiple asset classes to a broad network of clients, including buy- and sell-side firms. Knight serves clients as a market maker, and an important part of Knight’s business model is employing high-speed trading software to fulfill retail client orders using the Company’s own capital. Knight uses what it purports to be sophisticated algorithms in its proprietary software to place trades on a number of stock exchanges, including the NYSE, Nasdaq, NYSE Amex, the OTC Bulletin Board and OTC Markets.

Well aware of the colossal losses that could result from a trading failure and the commensurate need to comply with new stricter risk management regulations, Knight publicly pledged to its investors that the Company “carefully manages its risk,” that it maintained “efficient and reliable trading technology and infrastructure,” that the Company’s trading platform was “superior” to those of its competitors, and that Knight had robust systems in place to “identify, analyze, manage and report on all significant risks facing the Company.”

Specifically, the Complaint alleged that despite Knight’s continued representations that it maintained sound risk management procedures, in truth, throughout the class period, Defendants failed to adopt basic, industry-standard and SEC-mandated risk management and internal control practices. As a result of the Company’s lack of internal controls and risk management practices, on August 1, 2012, the Company accumulated an unintended market position of $7 billion worth of securities in the span of 45 minutes. Knight’s haphazard trading activity resulted in: (1) a $461 million loss and an impairment charge of $143 million; (2) an emergency and massively dilutive $400 million rescue deal to stave off the Company’s collapse; (3) a formal SEC action against Knight that concluded with a cease-and-desist order that imposed a $12 million fine and concluded that the Company had willfully violated the securities laws; and (4) the eventual firesale of Knight to an industry competitor at a fraction of its class period market capitalization. As the truth about Knight’s deficient controls and the consequences of such failures was revealed by the end of the class period, the Company’s stock price plummeted approximately 75% and wiped out over $750 million in market capitalization over a two-day trading period.

On December 13, 2012, the Court appointed Louisiana Municipal Police Employees Retirement System as Lead Plaintiff and Saxena White P.A. as Co-Lead Counsel. Lead Plaintiff filed an amended complaint on March 14, 2013, and a second amended complaint on December 20, 2013.

On February 18, 2014, Defendants filed their motion to dismiss the Second Amended Complaint, Lead Plaintiff filed their opposition to Defendants’ motion on April 21, 2014, and Defendants filed their reply on June 5, 2014.

While the Defendants’ motion to dismiss was still pending before the Court, the Magistrate Judge ordered the parties to submit confidential settlement letters in advance of a mandatory settlement conference that began on November 24, 2014. As a result of these negotiations, the parties reached an agreement to settle the claims for $13,000,000 on behalf of the class. On February 27, 2015, the Court preliminarily approved the settlement, and then on July 6, 2015, entered final judgment finding the settlement to be fair, adequate and reasonable in all respects.