More than three months after FXCM Inc, now known as Global Brokerage Inc, Drew Niv and William Ahdout filed a motion for summary judgment in a lawsuit brought by investors, the plaintiffs have opposed the motion.
This case stems from the events from February 2017, when FXCM reached settlements with the CFTC and NFA, in a move that led to its exit from the US retail FX market. The price of FXCM’s securities plummeted after the regulatory settlements were announced, thereby damaging investors in FXCM Inc.
The plaintiffs brought this class action suit against FXCM, Dror Niv and William Ahdout, alleging that, from March 15, 2012 until February 6, 2017, Defendants committed securities fraud in violation of Sections IO(b) and 20(a) of the Securities Exchange Act of 1934 and Rule l0(b)-5. Specifically, the plaintiffs allege that the defendants were responsible for false or misleading statements with respect to FXCM’s purported agency-trading model and FXCM’s relationship with another company, Effex Capital.
The plaintiffs, suing on behalf of themselves and all others similarly situated, allege that defendants violated the federal securities laws by knowingly misleading investors as to the nature of FXCM’s No Dealing Desk (NDD) platform and FXCM’s relationship with the largest market maker for its NDD platform.
On December 9, 2021, Lead Plaintiff 683 Capital Partners, LP (“683 Capital”) and Class Representatives Shipco Transport Inc. and E-Global Trade and Finance Group, Inc. submitted a memorandum of law in opposition to Defendants’ Motion for Summary Judgment.
The defendants claim that a reasonable person could not find from the facts of this case that defendants committed securities fraud. But the plaintiffs argue that
“reasonable persons have already done so. The U.S. Commodities Futures Trading Commission (“CFTC”) and National Futures Association (“NFA”) reviewed the same factual circumstances and found not only that Defendants publicly misrepresented FXCM’s relationship with Effex, but also that their misconduct was so severe it merited barring Defendants from operating in the U.S. Defendants protest that they admitted no wrongdoing in their settlements with the regulators, but the drastic penalties they agreed to speak for themselves. A reasonable jury will easily be able to find, as the CFTC and NFA already did, that the facts and evidence in this action support Plaintiffs’ allegations of securities fraud”.
In February 2017, after years of parallel regulatory investigations, FXCM entered into settlements with the NFA and CFTC. On February 6, 2017, the CFTC announced that it banned the broker from operating in the U.S. and fined it $7 million, after finding that FXCM was taking undisclosed positions opposite its retail customers.
In its Order dated February 6, 2017 (“CFTC Order”), the CFTC found that “FXCM and FXCM Holdings, by and through their officers, employees, and agents, including Respondents Niv and Ahdout, engaged in false and misleading solicitations of FXCM’ s retail foreign exchange (‘forex’) customers” by concealing that “FXCM had an undisclosed interest in the market maker that consistently ‘won’ the largest share of FXCM’ s trading volume – and thus was taking positions opposite FXCM’s retail customers.”
The same day, the NFA issued a Complaint and a Decision against FXCM, Niv, Ahdout, and Niv’s sister, Ornit Niv. The NFA found that the defendants committed the violations alleged in the NFA’s Complaint, including that FXCM directed customer trades to a liquidity provider, Effex, “that was purportedly independent but which FXCM actually supported and controlled. The NFA found that in exchange for the order flow that FXCM directed to Effex, Effex paid rebates to FXCM that amounted at times to as much as 70% of Effex’s profits from FXCM’s order flow and which FXCM referred to internally as ‘P&L’.”
The company also issued a press release on February 6, 2017, disclosing the settlements with the NFA and CFTC and announcing that the company would withdraw from doing business in the U.S. pursuant to the CFTC’s order. On this news, FXCM’s share price fell $3.40, over 68%, and the price of FXCM Notes fell over 42%.
The plaintiffs claim that the defendants’ fraud artificially inflated the prices of FXCM common stock and the FXCM Notes during the Class Period, and was revealed through disclosures about the regulatory settlements made on a single date, February 6, 2017 (after the close of trading), which dissipated the artificial price inflation and damaged Plaintiffs and the Class as the prices dropped the following day. Two weeks later, Niv resigned as CEO and director, and FXCM changed its name to Global Brokerage Inc.
In December 2017, the Company filed for Chapter 11 bankruptcy.
As FX News Group has reported, the defendants have moved for summary judgment on Plaintiffs’ and the Class’s Section 10(b) claims with respect to the elements of falsity, scienter, loss causation, and economic loss, and with respect to the element of reliance only as to 683 Capital’s individual claim.
The plaintiffs say that the defendants’ statements about FXCM’s agency model were materially false and misleading because the kickbacks FXCM received from Effex meant that FXCM had a significant financial interest in the liquidity provider standing opposite its customers’ trades. FXCM’s majority stake in Effex’s trading profits meant that:
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FXCM’s NDD model did not truly “align[] our interest with those of our customers,”;
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the risk that FXCM “could suffer reputational damage and additional regulatory scrutiny by offering execution to retail clients that creates an inherent conflict between the interests of the customer and our interests” was not based on FXCM separately and explicitly offering dealing desk execution, ¶150, but had already materialized based on the conflict of interest in the NDD model through Effex;
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FXCM was not truly “commit[ted] to the agency model” due to its undisclosed conflict of interest with its customers,
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FXCM did not “predominantly operate [its] retail business on an agency model,”; and
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that FXCM did not directly take a market position did not “eliminat[e] a major conflict of interest” between FXCM and its customers, was also false and misleading.
The plaintiffs do not claim that FXCM took market positions directly, but it was nonetheless exposed to market risk through its stake in Effex’s trading profits. Effex was exposed to market risk in the same way that a dealing desk was – they were exposed to the extent they did not hedge their positions. When Effex’s trading profits fell, it paid FXCM less.
Thus, even if FXCM did not suffer direct losses due to market movements, its revenues decreased when Effex made less and paid FXCM less through the variable monthly payments. Further, the plaintiffs argue that the defendants’ statements about “order flow” payments FXCM received were materially misleading because they misrepresented the source of the payments and omitted that FXCM was receiving kickback payments comprising up to 70% of Effex’s trading profits. Plaintiffs do not assert that Defendants’ revenue figures were quantitatively inaccurate, but rather that Defendants misrepresented the source of FXCM’s retail trading revenues and the nature of the purported “order flow” payments.
The plaintiffs also say that the defendants’ statements that FXCM’s retail trading revenue was primarily driven by, among other things, “payments we receive for order flow from FX market makers,” and that this income “represents payments received from certain FX market makers in exchange for routing trade orders to these firms for execution” were misleading because
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the “order flow” payments FXCM received from Effex were actually kickbacks of Effex’s trading profits; and
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during the periods covered by these statements, no other market maker paid FXCM for order flow from retail trading.
Put simply, the plaintiffs claim that FXCM generated trading revenues not only based on volume, but also from kickback payments from Effex, which varied based on Effex’s trading profits.
Finally, according to the plaintiffs, the defendants’ statements that FXCM “no longer receive[d] payments for order flow” were misleading because the only “payments for order flow” that FXCM received during the relevant periods were actually kickbacks of Effex’s trading profits.
Regarding the alleged GAAP violations, the plaintiffs note that the fact that E&Y issued clean audit opinions does not vindicate defendants’ GAAP violations. Rather, this evidence shows that Defendants’ concealed FXCM’s relationship with Effex from its auditor.
The plaintiffs request that the Court deny FXCM’s Motion because they have proffered evidence demonstrating genuine issues of material fact with respect to each of the challenged elements of their claims, including that the defendants made false and misleading statements of material fact.