Icap faces SEC scrutiny over Blackbird role

UK inter-dealer broker Icap could face a raft of regulatory probes due to accusations that it bought a minority stake in US electronic brokerage Blackbird to stifle potential competition to its own voice-brokered business.

The US Securities and Exchange Commission (SEC) was asked in a July 18 letter by Michael Oxley, chairman of the House of Representatives committee on financial services, to investigate allegations that Icap acquired a 19% stake in Charlotte, North Carolina-based Blackbird to block attempts by the company to firmly establish the electronic broking of interest rate swaps. Icap denied such charges.

Oxley also expressed concerns in the letter about Icap’s staff 'heist' on rival broker Cantor Fitzgerald, just weeks after the September 11 attacks in New York that resulted in the death of hundreds of Cantor employees. Cantor has a market lead in the electronic broking of US Treasuries, through its eSpeed trading platform.

As well as asking SEC chairman Harvey Pitt to investigate both matters, Oxley’s letter confirmed that the US Department of Justice (DoJ) is also looking into Icap’s Blackbird involvement. Oxley also urged Pitt to contact European jurisdictions about the issue, according to sources on Capitol Hill.

In an interview with Risk last week, an Icap spokesman said it had not been approached by the DoJ and believed Blackbird’s liquidity was too small to prompt any serious antitrust concerns. He said Icap’s actions against Blackbird were purely related to protecting a strategic investment.

Icap and Blackbird’s current board have been engaged in an acrimonious dispute over control of the company following Icap’s purchase of its stake in Blackbird early last year for a reputed $12 million. The London-based broker holds about 31% of the voting rights in Blackbird and has teamed up with Blackbird co-founder and former chief executive Ray May and his wife, Rita May, to throw out current board members, including Blackbird chief executive Mark Brickell, co-founder and president Shawn Dorsch and chairman Andy Baxter.

During a legal discovery process earlier this year, Icap and the Mays found they controlled only a 48% vote in Blackbird. Previously, Reuters, which holds more than 10% in Blackbird, joined Icap and the Mays to force board changes. This majority action was not followed through due to problems with the paperwork, parties involved in the matter said.

A Delaware court ruled on July 17 that Blackbird must hold an AGM by no later than September 10. Icap and the Mays are expected to vote for a change in board.

Blackbird management said it has consistently represented the best interests of the majority of the company’s 120-plus shareholders. But Philip Wood, managing director of business development at Reuters, told Risk he resigned his Blackbird board seat in March as he did not feel the board represented the wishes of the majority of the shareholders.

Both Icap and Reuters have written off their investment in Blackbird.

A full report investigating the dispute between Icap and Blackbird is published in the August issue of Risk.