(Dow Jones) A key consideration in the review-and rare reversal-of longstanding sanctions against two brokers involved this question: Can one family member adequately supervise another?

The answer from an appellate panel of the Financial Industry Regulatory Authority: Yes, when a brokerage has proper procedures in place.

The panel on Thursday dismissed charges that Kenneth Pasternak, former chief executive of Knight Securities L.P., and John Leighton, former head of the firm's institutional sales desk, were responsible for supervisory failures that led to allegedly fraudulent sales to customers. Pasternak had received a two-year suspension from supervisory roles as a result of the 2005 case. Leighton was barred from supervisory roles. Each man also was fined $100,000.

A key issue in the case was whether Pasternak and John Leighton adequately supervised Joseph Leighton, who was then Knight's leading institutional sales trader-and also John Leighton's brother. Regulators alleged that Joseph Leighton overpriced securities to institutional customers and raked in excessive profits for himself.

Pasternak and John Leighton didn't take reasonable steps to ensure that Joseph Leighton, the top trader, adhered to industry standards, according to the National Association of Securities Dealers, or NASD, which merged with the regulatory arm of the New York Stock Exchange to form Finra in 2007. Joseph Leighton was barred in 2005 as a result of settlements with the Securities and Exchange Commission and NASD.

The National Adjudicatory Council, Finra's appellate body, disagreed with the lower Finra panel's ruling against the supervisors, saying Finra didn't adequately prove its case. The council also found that Finra didn't establish that Joseph Leighton, the trader, violated market or regulatory standards. Institutional customers testified during the proceedings that the pricing was fair, according to Howard Schiffman, Pasternak's Washington, D.C.-based lawyer.

The reversal was just the latest victory for the pair, who had similar charges by the Securities and Exchange Commission thrown out by a federal judge in June 2008. A spokeswoman for Knight Capital Group Inc. in Jersey City, N.J., said the company wasn't a party to this case and considered its involvement to be resolved long ago.

Schiffman said a robust compliance program that recognized the Leighton brothers' relationship was a basis for the National Adjudicatory Council's decision, which found that there was no inherent conflict.

"The unrebutted evidence shows that Joseph Leighton received no special treatment from his brother," and was required to follow all supervisory and compliance procedures in place for everyone else, according to a 68-page opinion.

John Leighton also actively enforced Knight's compliance procedures and interacted frequently with his staff, according to the council. The opinion notes that a "team captain" acted as a liaison between the institutional sales department and Knight's compliance and legal department. That person reviewed any concerns raised by Knight's compliance department about trading by the desk.

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