“The court cannot find conscious misbehavior or recklessness when defendants’ business model had a successful track record and market investors were shocked by the SNB’s decision.” – Judge Kimba M Wood
On Thursday this week, US District Judge Kimba M Wood dismissed a shareholder class action lawsuit against FXCM, in which investors claimed that the company made false statements about its business model in the advent of the removal of the 1.20 peg on the EURCHF pair by the Swiss National Bank in January 2015.
The ensuing negative balances to which the firm was exposed, along with many other FX companies on the day that has become known as “Black Thursday” which led to the company taking an emergency loan from Leucadia, resulted in discourse by shareholders that led to a class action suit.
FinanceFeeds met with FXCM CEO Drew Niv this year. During the meeting, Mr. Niv explained in great detail how what FinanceFeeds considers to be his remarkable composure and standing as a leading senior FX industry executive enabled him to keep the company on an even keel despite the limited time available and the uncertainty of the actual exposure.
Mr. Niv succeeded in ensuring complete stability, against many odds, and must be commended for that.
The only aspect of the company that was damaged severely post SNB event was its share price, which the firm made steps toward rectifying with a reverse stock split, however this did not prevent a class action suit by investors.
The main points of the lawsuit relate to the outcome of the events that occurred on January 15, 2015, when the Swiss National Bank, contrary to a series of public statements made in the previous months, removed the peg on the EURCHF without any notice whatsoever which created unprecedented volatility.
Prior to that, FXCM had considered the previous period to have been the “lowest volatility in two decades” and had also striven to provide retail clients with the best execution methods available by executing all trades on a live market and not via a dealing desk.
Sadly, those who internalized every trade on January 15 actually profited, whereas the A-book brokers were exposed to negative balances.
In this case, which provided a positive outcome for FXCM, Judge Wood dismissed the class action lawsuit by shareholders, stating that the investors could not prove that FXCM and its executive team had intentionally inflated company stock, or acted recklessly ahead of the volatility caused by the removal of the peg by the Swiss National Bank.
A sensible outcome, as absolutely no entity whatsoever was privy to any prior indication that the Swiss National Bank would take such action.
Judge Wood said “The court cannot find conscious misbehavior or recklessness when defendants’ business model had a successful track record and market investors were shocked by the SNB’s decision.”
Although FXCM’s business model relied on monitoring its often leveraged customer accounts and automatically closing out positions if the account was at risk of going negative from a losing trade, the extreme volatility of the franc after the SNB decision led liquidity providers to stop providing prices or liquidity and FXCM could not close out customer accounts before their margin collateral was exhausted.
This decision comes at a time during which the Commodity Futures Trading Commission (CFTC) has filed a charge against FXCM for capital shortages during the Swiss National Bank’s removal of the EURCHF peg, a citation which FXCM is contesting and about which the company has made a public statement of its position.
A victory for common sense in this case. Risk management should also be considered by shareholders, especially when backing an agency brokerage which transfers its trades in all good faith to a live and liquid market.