--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, Getco
(Adds comments from Getco CEO, in the sixth and seventh
paragraphs.)
By Jacob Bunge and Jenny Strasburg
Knight Capital Group Inc. (KCG) Monday confirmed that 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., company 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 Knight common stock at
about $1.50 a share. Knight currently has about 89 million shares
outstanding.
The investor group includes 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 companies 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.
Though Getco and Knight compete intensely in the trading of
stocks and other securities, Getco Chief Executive Daniel Coleman
said buying into the stricken company represented a sound financial
investment for Getco and its own shareholders. He likened it to
Microsoft Corp.'s (MSFT) move to invest $150 million in Apple Inc.
(AAPL) in 1997, another pairing of unlikely partners.
"A world without Knight is a worse world as far as Getco is
concerned," said Mr. Coleman in an interview. "In some places we
bump heads, but we're all better off if Knight is a viable
competitor." He said Knight's presence in U.S. markets was
particularly critical for small- and mid-cap securities, an area of
expertise for the New Jersey company.
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 trading 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 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 uncertain. 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
what are known as 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," the NYSE
said.
Knight typically handles some $20 billion worth 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 company told customers it had received a line of credit
to allow it to stay open for business, but some of Knight'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.