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March 1, 2000

Washington Watch - All-Tech vs. Knight Settlement Unease: Both Sides Charge NASD Arbitration With

By William Hoffman

Neither side is happy after an NASD arbitration panel ruled on a complaint brought by All-Tech Investment Group against Nasdaq wholesaler Knight Securities.

At issue are ECN access fees allegedly owed to All-Tech by Knight. The panel dismissed All-Tech's claim against the Jersey City-based wholesaler for $97,537.50 in compensatory damages and $500,000 in punitive damages. The damages were based on the refusal of Knight to pay a 1.5-cent-a-share access fee to the Montvale N.J.-based day trading firm's Attain ECN.

In the end, Knight Securities seemed as unhappy with the recent settlement as did All-Tech.

"We have amateurs and uninformed individuals who either have never traded or who have never worked in a brokerage firm. But they write the laws and regulations we have to deal with," said Bill Singer, regulatory partner at Singer Frumento, the New York-based law firm that represented All-Tech. "Now we have warfare going on in the industry."

Michael T. Dorsey, general counsel at Knight/Trimark Group, parent of Knight Securities in Jersey City, agreed: "It was a failure of the system. We never viewed All-Tech or any of the others that are trying to levy these fees, as the enemy."

A spokesman for the SEC said the agency had no comment on the outcome of the case. The NASD did not respond to a request for comment.

No-Action Letter

All-Tech based its claim on a 1998 no-action letter by the SEC Division of Market Regulation, permitting an electronic system sponsored and operated by All-Tech to charge non-subscribing broker dealers. Knight argued All-Tech had no legal right to charge the fee.

But the NASD Regulation panel imposed a $1.25 per trade SelectNet charge and awarded All-Tech $3,870, plus 9 percent interest.

All-Tech, in turn, was ordered to pay Knight $6,430 in attorneys fees on a discovery issue. The result was a net payment by Knight to All-Tech of about $2,000.

"Nobody won in this case," Singer said, "and nobody lost. All that happened was the case made two law firms quite wealthy." Knight is petitioning the panel for an explanation of its decision, Singer said.

If the panel refuses, Singer said Knight will "probably" ask a court to order the panel to comply. If the court refuses, Knight will have to then consider its next move.

More Palatable

Knight's Dorsey said, "We still think we owe nothing. But a SelectNet fee of a dollar or even a dollar-and-a-quarter is much more palatable than a penny-and-a-half, unlimited."

Dorsey said nothing in the Securities Exchange Act of 1934 allows the SEC to impose or set fees that one exchange member firm charges the other.

"What one broker charges another broker is between them," he said. Knight is working to convince the SEC staff that such fees should be abolished, he said.

Mischief Making

All-Tech's Singer said the NASD played favorites in the case, choosing the "800-lb gorilla" in its dispute with his client. He noted that the NASD's plans to take the exchange public could put it in competition with some of its own member firms. "I'm not sure they don't welcome some of the mischief they're causing," he said.

Dorsey said Knight has settled fee claims made by two other ECNs as a result of the arbitration panel's decision. "It certainly helps drive the settlement process," he noted.

Singer lamented the lack of finality. He said the decision will bring more problems to an industry in upheaval. "Justice is a very elusive concept," he said.

"Attorneys can very rarely attain justice. I'd have to charge a lot more for that," he added.