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Former TD Waterhouse head takes over Madoff venture

Date: Monday, June 22, 2009
Author: Financial Post

Frank Petrilli, who ran TD Waterhouse for a decade, has no reservations about setting up his latest venture behind a door that -- until recently -- carried the infamous name Bernard L. Madoff.

"The door says Surge Trading now. It's under construction," says Mr. Petrilli, who will be chief executive of the new company formed by a group of investors that purchased the assets of Mr. Madoff's market-making business.

The market-making operations of Bernard L. Madoff Investment Securities LLC were run alongside but separately from the investment management operation that was revealed to be a stunning US$65-billion Ponzi scheme.

"We've done all the things a prudent person would do to ensure there was no involvement in that scandal," said Mr. Petrilli, whose investor group -- backed by venture capital financing from Fairhaven Capital Partners -- won a three-way bidding war for the assets with a US$25.5-million offer to the Madoff bankruptcy trustee.

"Due diligence" was also conducted before hiring key employees from the Madoff market-making and proprietary trading business.

The Madoff trading business was, before the scandal that saw its namesake plead guilty to fraud charges, the fifth-largest service provider for broker-dealers, custodians and clearing houses in the United States.

"No one had any complaints about the quality of the service," said Mr. Petrilli, who had a front-row view of the firm's trading execution and access to exchanges because TD Waterhouse was a client.

There are plans to ramp up service at Surge Trading Inc. to win comparable market share by the end of the first year of operation, says Mr. Petrilli, who retired as chief executive of TD Waterhouse in 2004 and also relinquished his position on parent company Toronto-Dominion Bank's executive leadership team.

Surge Trading will open its doors for business by the middle of the third quarter, provided it obtains regulatory approval from FINRA, the Financial Industry Regulatory Authority, he said. It will operate from the 18th floor of the oval red Manhattan tower known as "the lipstick building." The notorious Ponzi scheme, which Mr. Madoff acknowledged in March he ran for years by using new investor money to pay earlier clients, was conducted from the 17th floor.

"It's not necessary to move," said Robert Mazzarella, a 40-year securities veteran who was brought on as non-executive chairman of Surge Trading. "It's not the Bernard Madoff building, it's the lipstick building," he said, explaining that the firm does not expect to face fallout from the scandal.

Nonetheless, Mr. Mazzarella, a former president of Fidelity Brokerage Services and chairman of the Boston Options Exchange Regulatory Board, said he was recruited to help "win over former customers" and ensure that Surge Trading is run as a "clean, transparent organization."

He said he has no misgivings about the firm bringing on former Madoff workers, because "by and large they are good people who were caught up in something they didn't know was going on."

Madoff pleaded guilty to fraud, perjury and money-laundering and is to be sentenced on June 29.

Plans for the new market-making and proprietary trading venture go much further than re-establishing the business. Mr. Petrilli and his group ultimately want to use the trading technology and platform to take market share in the hedge fund and asset-management sectors.

"We have the infrastructure to tackle that business," says Mr. Petrilli, saying the predecessor company was "never really ... aggressive in doing that."

Industry watchers say it is not a bad time for a new -- or revived -- entrant in the market-making field, given that trading volumes have continued to grow despite the choppy markets stemming from the financial and economic meltdown. In addition, two of the top four market-makers in the United States, UBS and Citigroup, are making ongoing adjustments to their businesses in the wake of government bailouts.

Financial Post