(Richard Saker/AP Photo)
With the storm kicked up by Michael Lewis’ new book about high-frequency trading continuing to swirl, Virtu Financial—a high-speed electronic trading firm headed by former Paul, Weiss, Rifkind, Wharton & Garrison partner Douglas Cifu—has pushed back a planned initial public offering.
Bloomberg and The New York Times’ DealBook have reported that Virtu has decided to postpone by at least a week an initial public offering that could raise up to $250 million as the industry copes with the fallout generated by the release of Lewis’ “Flash Boys,” a book that has unnerved Wall Street and peaked the interest of regulators. The Federal Bureau of Investigation confirmed this week that it is investigating whether electronic trading firms engage in insider trading and New York State Attorney General Eric Schneiderman has issued his own call for curbs on high-speed traders as part of his own inquiry.
New York–based Virtu, which was founded in 2008 by New York Law School graduate and former New York Mercantile Exchange chairman Vincent Viola, detailed its plans to go public in papers filed with the U.S. Securities and Exchange Commisson in early March. Documents related to the offering—for which legal fees have not yet been disclosed—show that Davis Polk & Wardwell global capital markets cohead Michael Kaplan is advising underwriters, while Virtu has turned to John Kennedy, cohead of the North American capital markets and securities practice at Paul Weiss.
Paul Weiss and Virtu are closely linked. Cifu, a former deputy corporate chair at the firm, serves as the company’s CEO. The Am Law Daily reported last fall on how Cifu and Viola teamed up to buy the National Hockey League’s Florida Panthers in a $250 million deal. Though the arrival of new owners has not given the Panthers a boost in the standings this year, the team has retained an array of lobbyists to seek $80 million in public funds to renovate its home arena. (The 59-page proposal in which the franchise detailed its desires to Broward County commissioners has received a less-than-enthusiastic response from many in South Florida, a region no stranger to subsidizing professional sports teams.)
A spokesman for Cifu and Virtu told The Am Law Daily that neither could comment on the company’s own plans or the broader high-speed trading controversy because Virtu is in an SEC–mandated “quiet period” ahead of its expected IPO later this month. (CNBC took an in-depth look at Virtu’s highly profitable business, which differs in some ways from other electronic traders.)
While Virtu and Cifu must remain mum, another Am Law alum now operating in the high-frequency trading field has had plenty to say.
Former Orrick, Herrington & Sutcliffe associate William O’Brien—who went on to become an assistant general counsel at Goldman Sachs before being named president of Kansas City, Mo.–based electronic exchange BATS Global Markets in February after it completed its merger with rival Direct Edge—lit into Lewis and Brad Katsuyama, a prominent “Flash Boys” figure, during an explosive interview broadcast on CNBC earlier this week.
O’Brien, Lewis, and Katsuyama, who launched his own exchange, IEX Group, backed in part by hedge fund giant David Einhorn, sparred specifically over the ways in which high-speed traders use algorithms and other means to shave precious milliseconds off trades on their exchanges. (BATS was forced to correct some of O’Brien’s commentary on Thursday.)
As reported by The Am Law Daily at the time, BATS’ merger with Direct Edge last August—which came a little more than a year after BATS raised roughly $107 million in a somewhat troubled IPO—reflected an effort by the high-speed trader to take on more traditional exchanges like The Nasdaq OMX Group and NYSE Euronext. Davis Polk represented BATS on the merger, while Direct Edge turned to Wilmer Cutler Pickering Hale and Dorr for counsel. (Davis Polk had previously advised BATS on its 2012 listing, earning a share of what an SEC filing shows was $2 million in legal fees with Skadden, Arps, Slate, Meagher & Flom advising the IPO’s underwriters.)
BATS hired former SEC lawyer Eric Swanson as its general counsel in 2008 to help it win exchange status from the SEC. After leaving the agency, he found himself caught up in an internal investigation into the regulator’s alleged failure to heed warnings about convicted Ponzi schemer Bernard Madoff, whose niece, Shana Madoff, is Swanson’s wife. A report by the SEC’s inspector general ultimately found that the relationship did not affect the agency’s oversight of Madoff.
Swanson is hardly the only former SEC employee to dive into the world of high-frequency trading. In “Flash Boys,” Lewis—whose CNBC appearance was just one of many media stops this week—cites a study that claims more than 200 former SEC staffers have gone to work in the industry or have lobbied on behalf of high-speed trading firms or lobby over the past few years.
U.S. Senate lobbying records show that BATS paid Bryan Cave $40,000 last year for lobbying work, while Direct Edge separately paid Washington, D.C.’s Williams & Jensen $120,000 to advise on “market structure issues.”
The BATS–Direct Edge merger came on the heels of another tie-up involving high-speed traders: Getco LLC’s $1.4 billion acquisition of Knight Capital Group. That deal—which was approved on July 1 of last year and saw Sullivan & Cromwell and Wachtell, Lipton, Rosen & Katz take lead roles for Getco and Knight Capital, respectively—created KCG Holdings. Harvard Law School graduate Charles Haldeman serves as nonexecutive chairman of KCG’s board of directors; John McCarthy is the company’s general counsel.
Prior to the merger, Knight Capital paid Williams & Jensen $90,000 last year to lobby on securities regulation, equities markets and market data issues before terminating the engagement in the third quarter. Getco, meanwhile, paid $200,000 last year to government relations firm Rich Feuer Anderson to advise on “regulations affecting trading of securities, including market structure issues and systems integrity.”
Yet another high-speed trading firm, Houston-based Quantlab Financial, paid $50,000 to Patton Boggs last year to lobby on “issues related to automated, proprietary trading firms,” according to Senate filings. Quantlab is headed by former SEC lawyer Cameron Smith, who cowrote a letter to the editor of The New York Times in October 2011 complaining about a front-page story that he felt helped perpetuate “misunderstandings about modern professional traders.”
The letter’s second coauthor, attorney Richard Gorelick, is CEO of Austin-based proprietary trading firm RGM Advisors. Senate filings show that RGM paid Patton Boggs $120,000 last year for lobbying work. The Huffington Post reported this week that Gorelick is behind talking points being disseminated on Capitol Hill in response to Lewis’ book.
As for Katsuyama’s IEX Group, the upstart electronic exchange counts as a member of its board Lloyd Feller, senior counsel with Morgan, Lewis & Bockius’ investment management and securities industry group in New York and a former associate director of market regulation at the SEC. Feller, who helped launch Morgan Lewis’ securities regulation practice more than 30 years ago before retiring as general counsel of investment bank Jefferies Group in late 2010, rejoined Morgan Lewis the following year.