SEC accuses financial empire of Florida Panthers owners Viola, Cifu of fraud

By Dan Christensen, FloridaBulldog.org

The financial high-speed stock trading empire that made Florida Panthers hockey club owner Vincent Viola a multi-billionaire is under assault once again – this time by the U.S. Securities and Exchange Commission.

Last month, to no notice by Florida’s other media, the SEC formally accused Viola’s New York-based Virtu Financial Inc. and its broker-dealer subsidiary Virtu Americas LLC of perpetrating a sophisticated fraud that misled its many customers. Virtu Americas processes an eye-popping “25 percent of market orders placed by retail investors in the U.S,” according to the SEC.

“Defendants repeatedly – and falsely – told their institutional customers and the public that VAL [Virtu Americas] used ‘information barriers’ and ‘systemic separation between business groups’ in order to safeguard these customers’ material, nonpublic information,” says the SEC’s 23-page complaint filed in New York City.

The scheme allegedly lasted for at least 15 months, from January 2018 through April 2019. Virtu Financial reported $2.4 billion in revenues in 2022.

Viola, the Florida Panthers chairman, is Virtu’s founder and executive chairman. According to the company’s website, Viola has “led Virtu since its inception and provides the board of directors with valuable insight regarding strategic decisions and the future direction of our company.”

Viola, 67, and Virtu Financial are also embroiled in a Delaware lawsuit filed by Toledo, Ohio’s Iron Workers Local No. 55 that’s demanding Virtu be ordered to produce its books and records for inspection. The union suspects it has been cheated and alleges that Viola has used his control of Virtu to improperly divert hundreds of millions of dollars to himself, his family and his cronies.

FLORIDA PANTHERS CO-OWNER CIFU IMPLICATED

Virtu has denied the allegations and the case is moving toward trial. The case docket for Delaware’s Court of Chancery indicates that no trial date has been set.

Viola isn’t named or directly referenced in the SEC’s lawsuit against publicly traded Virtu Financial (NASDAQ: VIRT). But his longtime business partner and Florida Panthers minority owner, Virtu Financial CEO Douglas Cifu, is.

According to the SEC, Cifu made “false and materially misleading” public statements in both a November 2018 earnings call and presentation and again the following March in a letter “widely disseminated” to Virtu Americas’ customers.

“You see the importance we place on protecting client information in all aspects of our business,” the SEC quotes from Cifu’s 2018 earnings call. “We take this obligation seriously and we recognize and appreciate the natural concerns customers will no doubt have. Virtu has established policies and procedures for our existing client and market-making businesses that are designed to safeguard sensitive client information and will continue to design our policies and procedures with our clients in mind. These safeguards include physical separation, logistical access control and entitlement reviews. (Emphasis added.)”

The complaint says that “VAL and VFI [Virtu Financial] took further steps…to engage in a practice or course of conduct that operated or would operate as a fraud or deceit upon purchasers.”

Virtu has yet to respond to the SEC’s accusations in court. Virtu’s attorney, Lorin Reisner of the New York office of the Paul Weiss law firm, did not respond to Florida Bulldog’s requests for comment.

NO DOLLAR VALUE YET

The SEC’s complaint doesn’t put a dollar value on how much Virtu profited by violating federal securities laws, or say how much its misrepresentations cost Virtu’s customers. It appears those numbers are yet to be calculated.

Its complaint does note, however, that Virtu’s proprietary traders “had expertise in creating algorithms,” known as strategies, whose goal was to improve trading revenues. Virtu “had hundreds of thousands of individual strategies or instances of strategies that ran on a daily basis as part of the proprietary trading business,” the complaint says.

The SEC has asked U.S. District Judge John Koeltl to permanently enjoin Virtu from violating the federal Securities Act, order “each defendant” to pay unspecified civil penalties and also “to disgorge all ill-gotten gains, plus prejudgment interest” – a potentially sizeable sum.

The SEC traced the securities violations to Virtu Financials’ July 2017 acquisition of KCG Holdings, the owner of a broker-dealer firm with a large trade execution business with many institutional customers. The firm’s name was changed to Virtu Americas.

Prior to that, Virtu Financial primarily bought and sold securities for its own benefit using a proprietary database that recorded trading information in “seconds or milliseconds.” Before the KCG acquisition Virtu had “no significant trade execution business, so the lack of information barriers did not result in the risk” that Virtu’s proprietary traders would access customers’ material, nonpublic information, the complaint says.

After that, however, Virtu operated as both “a proprietary trading business, in which it bought and sold securities in its own account and for its own benefit, as well as a trade execution business for its large institutional customers, whereby it executed buy or sell orders from customers, typically for a commission,” the complaint says.

A FAILURE TO WALL OFF CUSTOMER INFORMATION

Virtu America’s policies at the time were supposed to wall off proprietary traders from access to customer trade information to prevent them from having access to nonpublic information “that could potentially provide them a trading advantage. But despite its recognition of the need for such policies and procedures VAL failed to implement them,” the complaint says.

While the scheme was underway, “virtually all” of Virtu Americas employees and “its affiliate broker-dealers” had access to that sensitive, private information about the stocks its clients were buying and selling, the execution prices and the volumes of shares, the complaint says.

Such information was valuable to Virtu’s proprietary traders by providing “insights” into which Virtu Americas customers were trading, in what securities, as well as the direction and size of each customer’s order flow, the complaint says. “Additionally, because larger orders by VAL’s institutional customers could be broken up into smaller orders placed over one day or several days, such post-trade information could provide further material, nonpublic insights into orders that may be forthcoming in a particular security.”

The complaint says Virtu “profited” from commissions that flowed as a result of the false and misleading statements put out for public consumption.

Virtu Financial, “as the parent company, also profited from VAL’s false or materially misleading statements: VFI reports its financials on a consolidated basis that includes VFI’s equity interests in VAL and other subsidiaries. Had VAL candidly told customers that proprietary traders enjoyed essentially unfettered access to the…database [which contained their post-trade information], and that it had no system to track or monitor who was accessing that data, those customers may reasonably have chosen to route their orders to a competitor for execution.”

Virtu Americas’ customers, then, were “deprived” of “an opportunity to make an informed decision about how to protect their trade data.” So Virtu executed orders, and received commissions “from customers that it might not otherwise have received if it had disclosed the lack of reasonable information barriers as to the…database,” the complaint says.