By Dan Christensen, FloridaBulldog.org
Vincent Viola, the multi-billionaire owner of the Stanley Cup champion Florida Panthers, is the principal defendant in a class-action lawsuit alleging he used his control of Virtu Financial Inc. to divert more than $400 million in cash from Virtu’s stockholders to “himself and his confederates.”
“And the harm is ongoing,” says the complaint brought by Iron Works Local No. 55 Pension Fund of Toledo, OH.
Those confederates, who are Viola’s co-defendants, include Viola’s son and Virtu chairman Michael Viola and Panthers hockey team vice chairman and Virtu CEO Douglas Cifu. Vincent Viola and Cifu founded Virtu in 2008. Virtu Financial and 13 other current and former directors and officers are also named as defendants.
“Viola’s scheme rests on the lack of public understanding of the mechanics and impact of Virtu Inc.’s massive ‘share repurchase program’ in light of Virtu Inc.’s unusual and complex corporate structure,” says the lawsuit brought by Iron Workers Local No. 55 Pension Fund and “on behalf of others similarly situated.”
Lawyers for both sides have declined to comment. In public filings with the U.S. Securities and Exchange Commission, Virtu Financial has said “the Company believes that any potential allegations of wrongdoing are without merit and is defending itself vigorously.”
The union pension fund owns an undisclosed number of shares of Virtu stock. The company’s shares rose more than 70 percent in 2024.
Viola, a 69-year-old West Point graduate, purchased the National Hockey League’s Florida Panthers in 2013. President Trump nominated Viola to serve as Secretary of the Army in 2017 during his first term. However, weeks later, Viola withdrew his name from consideration for that job.
Cifu, before co-founding Virtu, was an attorney at Paul, Weiss, Rifkind, Wharton & Garrison LLP, a huge New York-based law firm with more than 1,000 lawyers around the world. Viola was Cifu’s client before they became partners.
Together they also control Sunrise Sports & Entertainment and the west Broward area in where the Panthers play.
VIOLA AND CIFU ARE LONGTIME FRIENDS
The lawsuit contends that Viola and Cifu are tight. “After the Panthers won the Stanley Cup in June 2024 [by defeating the Edmonton Oilers] and having his name engraved on Lord Stanley’s Cup, Cifu tweeted ‘Thank you Vinnie for letting me share this journey with you!…Dreams do come true.’ Eight years earlier, Cifu tweeted the following, with a picture of himself embracing Viola:”
Virtu Financial Inc. (NASDAQ: VIRT), headquartered in Manhattan, is a market maker and high-frequency securities trading company that uses proprietary computer algorithms to analyze data and execute large volumes of buy and sell orders in fractions of a second based on market conditions. Such speedy trades, often used by large corporations, are typically the most profitable.
And it’s a business that’s highly profitable for Virtu. On Jan. 29, it reported its 2024 total revenues were nearly $2.877 billion. Net income was $534.5 million.
The 84-page complaint filed Jan. 24th in Delaware’s Chancery Court, where Virtu was incorporated in 2013, follows an earlier suit by the pension fund that asked a judge to force Virtu to turn over its books and records for it to investigate suspicions of “apparent wrongdoing.” The complaint contains much new information about how the company is run and how Viola and his cronies allegedly profited at the expense of those who bought Virtu’s publicly traded Class A shares.
In a nutshell, the complaint contends that Viola “controls 86.9 percent of Virtu Inc.’s voting through his ownership of super-voting Class D common stock, which lacks any economic rights. Viola has stacked Virtu Inc.’s board of directors with family, friends and longtime business associates.”
Viola set things up that way when Virtu was preparing to go public in 2015 using the “complex” corporate structure known as the “UP-C,” short for Umbrella Partnership Corporation.
Here’s where we have to follow the corporate bouncing ball.
“At all relevant times, pre- and post-IPO [initial public offering], Virtu Financial LLC, a limited liability company, has served as Virtu’s operating entity. Virtu LLC is a financial services firm that provides execution services and data, analytics and connectivity products to its clients. To go public in an UP-C structure, Viola kept Virtu LLC as the operating entity but placed a shell corporation, Virtu Inc., on top of Virtu LLC,” the lawsuit says.
Class A stockholders — that is most retail purchasers — own a 100 percent “economic interest” in Virtu Inc., the shell company with no operations of its own. “It was created at the time of the IPO as part of the UP-C structure to hold units of the operating entity, Virtu LLC, on behalf of its public Class A stockholders,” says the complaint. Each Class A share, it says, corresponds to one Virtu LLC unit held by Virtu Inc., which owns approximately 60 percent of Virtu LLC.
Viola and other investors who directly held Virtu LLC units before the IPO continue to hold them, but because those private unitholders own Virtu LLC units directly “they own a zero percent economic interest in Virtu Inc.,’’ the suit says. But those units are the economic equivalent of the publicly traded Class A shares of Virtu Inc. and “can gain liquidity in the public markets by converting their units into Class A shares on a one-for-one basis,” the lawsuit says.
THE ALLEGED FRAUD
Here’s where the alleged fraud begins to arise.
In recent years, Virtu LLC has “generated tremendous amounts of excess cash” allowing the board to decide where to direct that “excess cash.’’ The board, the suit says, “has consistently made the decision to have Virtu Inc., as the managing member of Virtu LLC, cause Virtu LLC to make pro rata profits distributions to all unitholders, including Virtu Inc., Viola, and the other private unitholders.’’
Viola and the private unitholders, of course, keep their portion of these pro rata distributions. And then Virtu Inc.’s board must then decide what to do with the company’s 60 percent share.
“Virtu Inc. had historically dividended (sic) the vast majority of its excess cash to Class A stockholders, but in late 2020, the Board began authorizing increasingly large stock repurchases, now totaling over $1 billion. The board’s choice not to dividend the cash at the Virtu Inc. level to Class A stockholders and instead use the cash for repurchases is a conflicted decision which had the purpose and effect of unfairly benefitting Viola and the other private unitholders,” the suit says.
How so?
All investors share equally in a return of capital dividend. The lawsuit uses this example to illustrate: Virtu LLC makes a $100 million pro rata cash distribution to all its unitholders. Virtu Inc. would get $60 million to pass along. Viola and the other private unitholders would collect the other $40 million.
But the lawsuit contends that if Viola and the board he controls instead caused Virtu Inc. to spend that $60 million in excess cash on stock repurchases, not dividends, the Class A stockholders would instead receive 60 percent of the value of their share of the repurchases, or $36 million. That is, 60 percent of the $60 million.
Viola and the private unitholders would receive $40 million from the initial pro rata distribution plus an additional $24 million, or 40 percent of the value of the $60 million in repurchases.
“In other words,” the lawsuit says, “Class A stockholders only receive $36 million of value, even though they have a 60 percent economic interest in Virtu LLC, whereas Viola and the private unitholders receive $64 million of value ($40 million plus $24 million), even though they only have a 40 percent economic interest in Virtu LLC.”
The repurchases also reduce the number of Virtu LLC units, raising the value of the remaining units value.
Since 2020, the board has chosen to “approve ever-increasing stock repurchases that benefit Viola with money that should have gone solely to Class A shareholders,” the suit says. Nor, it says, did Viola or Cifu disclose that they “planned to use Virtu’s complex UP-C structure to configure Virtu’s buyback program in a way that diverted wealth disproportionately to themselves.”
No trial date has been set in the pension fund case.
At the same time, Viola’s financial empire is under assault by the U.S. Securities and Exchange Commission, which has accused Virtu Financial Inc. and its broker-dealer subsidiary Virtu Americas LLC (VAL) of pulling off a sophisticated fraud that misled its many customers.
The SEC is asking a federal judge in Manhattan to order the Virtu entities to disgorge all ill-gotten gains, plus prejudgment interest and “appropriate civil penalties.”
No dollar amounts were mentioned, but they appear to be formidable, The SEC complaint states that Virtu Americas processes an astonishing “25 percent of market orders placed by retail investors in the U.S.”
“Defendants repeatedly – and falsely – told their institutional customers and the public that VAL used “information barriers” and “systemic separation between business groups” in order to safeguard these customers’ MNPI [material, nonpublic information]. In fact, VAL did not place this information behind information barriers that safeguarded MNPI.”
U.S. District Judge John Koeltl ordered both sides to be ready for a jury trial by Dec. 15.
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