Pipeline’s Berkeley, Federspiel Leave Company After Scandal

The chairman and chief executive officer of Pipeline Financial Group Inc., a dark-pool operator that settled allegations last month that it misled customers, have left the firm.

Alfred Berkeley III, a former Nasdaq Stock Market Inc. president, retired, and Fred Federspiel, the nuclear physicist who founded Pipeline in 2004, resigned, according to an e-mailed statement. Each agreed to pay $100,000 to settle the claims and New York-based Pipeline paid a $1 million penalty, the Securities and Exchange Commission said Oct. 24.

Allegations that Pipeline failed to provide the confidentiality and type of liquidity it pledged stunned colleagues in the electronic trading community, where Berkeley and Federspiel were pioneers. The company is working to repair relationships that were harmed with customers after the settlement became public, according to Jay Biancamano, who was named executive chairman today.

“There has been a reputational hit on the company as a result of the SEC order,” Biancamano said in a phone interview. “It’s going to be a challenge to overcome that, but I’m confident we can. The people and technology here are something that’s very viable in the market.”

‘What it Takes’

Biancamano will do “what it takes to earn back the trust of clients,” he said. He expects to speak with some of them as soon as tomorrow. “The ultimate goal is to win back the client confidence,” he said.

Pipeline began seven years ago as an SEC-registered dark pool, or privately operated platform to trade securities away from exchanges. It’s one of the largest block trading platforms based on the average size of transactions, along with Liquidnet’s main dark pool, according to a report on Oct. 19 by Rosenblatt Securities Inc.

Biancamano, who replaces Berkeley, was previously global head of marketplace and corporate strategy at Liquidnet Holdings Inc., a New York-based company that runs two dark pools for institutions and is a Pipeline rival. Biancamano left Liquidnet in February and is a former vice president and director at New York-based Investment Technology Group Inc.

Market Structure

“We are fortunate to have a leader of Jay’s caliber join us,” Reid Curley, chief operating officer of Pipeline, said in the statement. “He is widely admired in the industry for his deep understanding of market structure, his history of successful innovation, and his personal integrity.”

Federspiel declined to comment when reached by telephone. Berkeley couldn’t immediately be reached. Their departures were previously reported by the Wall Street Journal.

The trading platform advertised by New York-based Pipeline was billed as a “crossing network” that matched customer orders with those from other clients, providing what’s called “natural liquidity,” the SEC said. Those claims were misleading, because Pipeline’s parent company owned a trading entity that filled the vast majority of customer orders, according to the order.

The affiliate, Milstream Strategy Group LLC, sought to predict the trading intentions of Pipeline’s customers and trade elsewhere ahead of those orders before filling Pipeline clients’ requests, the SEC said. From the launch of the Pipeline dark pool in 2004 through the end of 2009, Milstream participated in about 80 percent of the volume on the platform, the SEC said.

The affiliate didn’t make money for Pipeline, the SEC order said. From 2004 through 2006, it lost about $19.7 million on its trading. While it made $32.2 million in trading profit from 2008 to 2010, expenses including compensation exceeded the gains, the SEC said.

Pipeline created an incentive system for traders at the affiliate to address conflicts of interest. A bonus system was instituted to encourage traders to buy and sell profitably “while at the same time reducing their incentive to trade to the detriment of Pipeline’s customers,” the SEC said.

(Adds company statement starting in first paragraph, Biancamano appointment.)
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