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Virtu Financial Sued for ‘Staggering’ Payouts to Viola, Insiders

March 11, 2022, 8:05 PM

A pension fund sued Virtu Financial Inc. in Delaware over claims that its billionaire founder, Vinnie Viola—a former Trump cabinet nominee who owns the NHL’s Florida Panthers—may be “abusing his control” over the business by “siphoning” hundreds of millions from public investors.

The lawsuit, made public Thursday, seeks internal files to investigate concerns that Viola is exploiting the company’s “up-C” structure by diverting cash from Virtu, a publicly traded shell corporation, to insiders with direct equity in its operating subsidiary reflecting their stakes before its 2015 initial public offering.

“The numbers are staggering,” but “after many months of delays, misdirection, and gaslighting, Virtu continues to refuse to produce documents that are necessary and essential for plaintiff’s investigation,” according to the complaint in Delaware’s Chancery Court.

The suit doesn’t allege any wrongdoing outright. Instead, it requests documents under a state law giving corporate shareholders broad inspection rights if they credibly suspect self-dealing or conflicts of interest. Records cases often reflect an attempt to drum up fiduciary breach claims.

A representative for Virtu called the allegations baseless in a statement to Bloomberg Law on Friday, saying the company’s leaders are “confident that we have conducted ourselves in the best interests of our stockholders” and pledging that Virtu would defend itself “vigorously.”

“The complaint is rife with errors and inaccuracies about the company’s practices and structure,” the statement said. “Our management and board of directors take our fiduciary obligations very seriously, and we have a transparent, fully disclosed plan to maximize value for all shareholders, irrespective of class.”

Companies that go public as up-C corporations have two ownership classes: insiders and other early investors who continue to directly hold equity in the original operating entity, and holders of class A shares in its public parent corporation that are supposed to equal the equity units in value.

The original investors, who get tax benefits from the company’s new pass-through structure, usually have the right to convert their equity units to public shares. They’re also given class B shares in the parent company that carry voting rights only.

According to the complaint, Viola has “exploited” his 82% voting control over Virtu to upset the economic balance between the class A shares and the equity units by giving “outsized distributions” to himself and other unitholders.

Despite economically owning only about a third of the company, Viola and other pre-IPO owners have taken about $706 million in cash distributions over the past seven fiscal quarters, while public investors owning two-thirds of Virtu have gotten only $208 million in cash dividends, the suit says.

It was originally filed under seal March 7 by the Iron Workers Local No. 55 Pension Fund.

Viola was nominated by President Donald Trump in early 2017 to serve as Army Secretary but ultimately withdrew from consideration, citing business conflicts. In addition to the NHL’s Panthers, he co-owns 2017 Kentucky Derby winner Always Dreaming.

Cause of Action: Section 220 of the Delaware General Corporation Law.

Relief: Disclosure of relevant company records; costs and fees.

Attorneys: The pension fund is represented by Friedlander & Gorris PA, Robbins Geller Rudman & Dowd LLP, and Shobe & Shobe LLP.

The case is Iron Workers Local No. 55 Pension Fund v. Virtu Fin. Inc., Del. Ch., No. 2022-0211, complaint unsealed 3/10/22.

To contact the reporter on this story: Mike Leonard in Washington at mleonard@bloomberglaw.com

To contact the editors responsible for this story: Rob Tricchinelli at rtricchinelli@bloomberglaw.com; Nicholas Datlowe at ndatlowe@bloomberglaw.com