Madoff's trading legacy meets its maker

NEW YORK Thu Oct 6, 2011 4:46pm EDT

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NEW YORK (Reuters) - The last vestige of Bernard Madoff's trading empire has disappeared from Wall Street.

Surge Trading, which agreed in June 2009 to pay as much as $25.5 million for the convicted swindler's trading operations, has closed its doors because of insufficient capital.

The company, which was backed by venture capitalists and veterans of discount brokerage firms such as Fidelity Investments and TD Ameritrade Holding Corp, hoped to prosper by executing stock trades for brokerage firms that service small investors.

Madoff made his name and initial fortune on Wall Street legitimately through Bernard Madoff Investment Securities, a "third-market" trading business. It bought and sold stocks for brokerage firms that preferred to send some orders to independent market-makers rather than to brokers on the New York Stock Exchange or other conventional venues.

To encourage orders, firms such as Madoff's often rebated a portion of their execution fees to brokers with large bases of relatively unsophisticated retail clients. His mastery of market structure and of techniques such as payment-for-order flow that he claimed increased price competition earned him respect from regulators and competitors.

Few in the equities trading world were aware of his side business as an investment manager, the notorious decades-long Ponzi scheme that cost investors some $13 billion, according to U.S. prosecutors, and led to Madoff's 150-year prison term.

SEASONED EMPLOYEES

Frank Petrilli, a former chief executive of TD Waterhouse, considered the trading business sufficiently removed from the scam to justify reviving it.

"I am proud to be working with this team of seasoned, dedicated and client-focused specialists," Petrilli said in June 2009 when he announced he would be CEO of the former Madoff operation and its dozens of traders. "Together we will build a performance-focused organization."

By March 2010, Surge was trying to modify its purchase agreement, which included a $1 million cash payment and up to $23.5 million in contingent payments by the end of 2013. In March Surge told the federal bankruptcy court overseeing the liquidation of Madoff's assets that its auditors refused to certify its books because the contingent payments could leave it short of required capital.

In an August 25, 2011, letter sent to clients and obtained by Reuters, Surge indicated that its attempt to raise capital from strategic partners fizzled.

"With regret, we must inform you of the Surge Trading board of directors' decision to begin the voluntary wind-down of our firm," the letter said, adding that Surge would stop accepting new orders as of September 1. The home page of the company's website now says it "is not currently engaged in trading operations."

The letter asserted that Surge's net regulatory capital and money on hand were sufficient to support its business in the short-term but that its quest for growth and investment capital had failed.

"While there has been expressed interest in doing a deal, recent market volatility and low interest rate environments have not been especially helpful in getting a deal done," the letter said.

In a little more than two years of operation, Surge did business with more than 50 firms that regularly sent in orders, the letter said, and it assured clients it would have no problem clearing and settling their outstanding trades.

Joseph Marinaro, Surge's chief of business development and strategy, referred calls for comment to a spokeswoman, who said she no longer represents the company. Calls to Petrilli and other executives were not returned.

(Editing by Steve Orlofsky)

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