Madoff Market-Making Business Revived by Surge
Madoff’s Market-Making Business Revived by Surge
By Edgar Ortega

June 18 (Bloomberg) -- The market-making business of Bernard Madoff is resurfacing under the leadership of former executives from TD Waterhouse Group Inc. and Fidelity Investments.

Surge Trading Inc., led by former TD Waterhouse Chief Executive Officer Frank Petrilli, will seek regulatory approval to enter the business of pairing buyers and sellers of stocks on U.S. exchanges. The New York brokerage completed the purchase of assets from Madoff Investment Securities LLC yesterday and has rehired “key personnel” responsible for the operations, which weren’t linked to Madoff’s Ponzi scheme.

Madoff’s trading business generated revenue of as much as $5 million a month in 2008 by handling orders in companies including General Electric Co. and Citigroup Inc. from about 100 brokerages that cater to small investors, according to a sale presentation last year by investment bank Lazard Ltd. Petrilli, who ran TD Waterhouse for a decade, said he plans to expand far beyond the size of Madoff’s firm over the next two years.

“The order of battle is to restart the engine and get our market share to what it was,” Petrilli said in an interview. “The second phase will be to look to grow the business in multiples of what it was, both in terms of the number of stocks we will be making markets in, as well as expanding the target client base.”

23rd-Largest Trader

Citigroup Inc., UBS AG, Knight Capital Group Inc. and Citadel Investment Group LLC are the five largest market makers handling orders from so-called retail brokerages. Madoff’s firm was the 23rd-largest market maker on the Nasdaq Stock Market in October, handling a daily average of about 50 million shares a day, exchange data show.

Boston-based Castor Pollux Securities Inc., which changed its name to Surge, outbid two other firms to win Madoff’s operation, agreeing to pay as much as $25.5 million. The funds helped investors recover some of the money they lost to Madoff, who pleaded guilty on March 12 to defrauding investors by using money from new ones to pay off old ones in a $65 billion Ponzi scheme.

Petrilli said he’s confident the employees rehired from Madoff’s firm weren’t involved in the illegal activities.

“There was vetting of the people involved in the market making-business by investigators and regulators,” he said. “We feel very, very comfortable with the due diligence that we’ve done.”

Fairhaven, Fidelity

In March, Castor raised an undisclosed amount from Fairhaven Capital Partners, a venture capital firm in Cambridge, Massachusetts, with $400 million in assets. Paul Ciriello, founder of Fairhaven, said in an interview today that the firm’s investments average $5 million.

Ciriello helped recruit Petrilli in May to lead Surge, and tapped Robert P. Mazzarella, an 18-year veteran of Boston-based Fidelity’s brokerage unit, to act as chairman. Former Castor CEO, Darin Oliver, will remain at Surge Trading as president.

Surge will use part of Madoff’s former headquarters in midtown Manhattan’s so-called Lipstick Building.

To contact the reporter on this story: Edgar Ortega in New York at ebarrales@bloomberg.net.

Last Updated: June 18, 2009 18:07 EDT
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