--Rescue plan will help fill hole left by errant trading last
week
--Knight entered into "securities purchase agreement" with
investor group
--Investor group includes Jefferies, TD Ameritrade and Getco
By Jacob Bunge and Jenny Strasburg
Knight Capital Group Inc. (KCG) on Monday confirmed the
embattled brokerage had agreed to a $400 million rescue plan that
would address huge losses caused by errant trading last week.
The Jersey City, N.J., firm told regulators in a filing Monday
that it had entered into a "securities purchase agreement" on Aug.
6, selling $400 million worth of 2% convertible preferred stock in
itself to a group of investors. Those securities will be
convertible into about 267 million shares of common stock in the
company at about $1.50 a share. Knight currently has about 89
million shares outstanding.
The investor group includes the bank Jefferies Group Inc. (JEF),
which took the lead, as well as brokerage firm TD Ameritrade
Holding Corp. (AMTD) and trading firm Getco LLC, Knight confirmed
in a statement. Stifel Financial Corp. (SF), Blackstone Group LP
(BX) and Stephens, an Arkansas investment bank, are also
investors.
"I'm confident we settled on the best solution for our company,"
Knight Chief Executive Thomas Joyce said in an interview with CNBC.
A large number of firms reached out to Knight as it fished for a
lifeline following Wednesday's wayward trading, Mr. Joyce said.
Knight has agreed to expand its board by three members, it said.
Currently the board has seven directors, with Mr. Joyce serving as
chairman.
Knight had said previously that as a result of the loss it
"experienced reduced order flow and liquidity pressures, and its
capital base was severely impacted."
Knight shares were down 26% to $2.99 in recent trading. The
stock closed Tuesday, before the glitch, at $10.33.
In the CNBC interview, Mr. Joyce said Knight was forced to make
a quick deal because the company was under tremendous stress. He
said that the cash injection, while hurtful to Knight's
shareowners, left the company in a better financial position than
it was a week ago, before the trading program ran off course.
Separately, the New York Stock Exchange's parent company, NYSE
Euronext (NYX), took precautions over the weekend as Knight's
funding remained an uncertainty. The NYSE shifted responsibility
for handling trading in more than 600 securities, normally overseen
by Knight, to rival trading firm Getco. The responsibility relates
to so-called designated market makers on the Big Board and NYSE
MKT, formerly Amex.
Like Knight, Getco is a big market maker in NYSE-listed
securities, standing in to buy and sell at publicly quoted
prices.
The reassignment of Knight's responsibilities to Getco is
temporary and in the interest of "market integrity," NYSE said in a
statement Monday morning. Once Knight's funding comes through,
oversight will go back to Knight "in a timely manner."
Knight typically handles some $20 billion of shares a day
through the New York Stock Exchange, much of that for retail
brokerages that serve small investors. Early Friday, the
17-year-old firm told customers it had received a line of credit to
allow it to stay open for business, but some of the firm's largest
clients continued to steer their business to rivals.
Sandler O'Neill + Partners LP and Wachtell Lipton Rosen &
Katz advised Knight on the transaction. Advisers on the investor
side included Barclays PLC (BCS, BARC.LN), which worked with TD
Ameritrade on the deal, according to a person familiar with the
matter.
The deal ensures Knight remains afloat and able to trade, but
could also presage a breakup of the company, according to a
research note Monday from J.P. Morgan.
"The company was already trading in the midsingle digits given
the lack of transparency, and valuations as a going concern will
likely fall meaningfully from there," wrote analyst Kenneth
Worthington. "Given this perspective, we expect investors will look
to value the [Knight] pieces, expecting the parts to be divested at
more opportunistic times."
Knight's request that it be allowed to cancel many of last
Wednesday's errant trades was rejected by Mary Schapiro, chairman
of the Securities and Exchange Commission, forcing Knight to unload
the stock it had bought, incurring the $440 million loss. Goldman
Sachs Group Inc. (GS) bought the stock in a bulk lot at a discount.
The errant trades were fired off a day after Knight installed
software related to the launch of a New York Stock Exchange
platform aimed at attracting more retail investors.
Mr. Joyce acknowledged Monday that he had debated with
regulators over how many of the millions of trades made during the
episode would be canceled. Ultimately, regulators and exchange
officials late Wednesday determined to cancel trading in just six
securities, versus an initial count of 148 stocks affected by
Knight's error.
"The regulators' job is not to save Knight Capital Group," Mr.
Joyce said. "The SEC's job is to prevent systemic risk to the
capital markets."
Mr. Joyce said Knight was conducting an internal investigation
into the matter.
--Saabira Chaudhuri contributed to this article.
Write to Jacob Bunge at jacob.bunge@dowjones.com and Jenny
Strasburg at jenny.strasburg@wsj.com.