This year, I introduced a weekly series called "CEO Gaffe of the Week." Having come across more than a handful of questionable executive decisions last year when compiling my list of the worst CEOs of 2011, I thought it could be a learning experience for all of us if I pointed out apparent gaffes as they occur. Trusting your investments begins with trusting the leadership at the top -- and with leaders like these on your side, sometimes you don't need enemies!
This week, I want to highlight the debacle surround leading market-making firm Knight Capital Group (NYSE: KCG ) and its CEO, Thomas Joyce.
The dunce cap
Well isn't this magical... another financial company in the Gaffe of the Week column. I'm moderately tempted to start calling this the "Financial CEO Gaffe of the Week" because I doubt I'd have trouble finding weekly material.
Sarcasm aside, the software glitch at Knight Capital a little more than one week ago that transformed the nation's leading order-routing firm into a company panhandling for a cash infusion in just a matter of days goes beyond the realm of gaffe into an unchartered territory known only as "What the heck?" I'm not exactly certain which is worse, the glitch itself, or the subsequent financing Knight's CEO arranged, but neither is working in the favor of current shareholders.
This tale of woe all began last Wednesday when Knight debuted new glitchy trading software. When software doesn't behave as planned, you want to quickly terminate it. This wasn't the case with Knight's software, which went haywire for 45 minutes before anyone was able to shut it off, causing trading in 148 companies listed on U.S. stock exchanges to trade abnormally. Knight, stuck with these unintended trades, lost most of its working capital -- a total of $440 million, or $270 million after-tax.
First of all, being the premier market-maker, why weren't there better software fail-safes?
To the corner, Mr. Joyce...
Just in case you thought the pain would end with Knight's trading loss, grab a seat and some popcorn because things just got real.
Over the weekend, Joyce and Knight's management team negotiated a $400 million lifeline that will allow Knight to stay liquid and return to its role as a leading market-maker as of this coming Monday. The deal didn't come cheaply, however. A consortium of six firms including, Blackstone Group (NYSE: BX ) , TD AMERITRADE (NYSE: AMTD ) , Jefferies Group (NYSE: JEF ) , Stifel Nicolaus, Stephens, and rival Getco, agreed to purchase $400 million worth of preferred shares that they can convert into common stock at $1.50 per share over the next 10 days. That move will more than triple Knight's outstanding share count to approximately 350 million shares.
The deal might appear to be a necessary evil, but were things really so dire that Joyce needed to secure $400 million in financing by diluting the daylights out of his shareholders? Perhaps.
One thing last week's loss did was to set a precedent that not all trading errors will simply be canceled by the prevailing stock exchange. Unlike in 2010 when countless trades were canceled by NYSE Euronext (NYSE: NYX ) following the computer-generated "flash crash," NYSE officials denied Knight's requests that trading in 140-plus equities last Wednesday be canceled. The rule appears to be that trades are canceled only when lots of trading shops all mess up together. This time, it was just Knight.
Knight has made its bed and now it has to lie in it. Between the time it took to identify and stop the glitch and the resulting painful financing deal, this has gaffe of the year candidate written all over it.
Do you have a CEO whom you'd like to nominate for this dubious honor? Shoot me an email and a one- or two-sentence description of why your choice deserves next week's nomination, and you just may wind up seeing your nominee in the spotlight.
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