AFX cannot be expected to fund a settlement, counsel says

Maria Nikolova

“Ultimately, and regrettably, it would appear that the settlement failed because the AFX business failed”, says counsel for the firm in a US lawsuit brought by Chapter 11 Trustee for Gallant Capital Markets and Avenica.

The lawsuit targeting AFX Capital Markets, Ltd., AFX Capital US Corp. and STO Super Trading Online continues at the New York Eastern Bankruptcy Court, with the defendants now seeking to rebuff a motion by Chapter 11 Trustee Esther DuVal for sanctions against AFX.

Documents filed with the Court on Monday (October 28th) by the firm representing the defendants (collectively referred to as “AFX”) seek that the Court denies the plaintiffs’ motion. The filing of these documents per se is puzzling, given that, a while ago, the counsel for the defendants has stated she cannot contact AFX because of the administration proceedings in the UK and the license suspension in Cyprus.

But the documents are there, stating that “Defendants, AFX Capital Markets, Ltd., AFX Capital US Corp. and STO Super Trading Online, by their attorneys White and Williams LLP, object to the Trustee’s motion”.

As one might expect, the documents insist that AFX did not act in bad faith and that “the settlement ultimately was undermined by events outside of defendants’ control”. The settlement was proposed in May 2019, but later fell through as AFX failed to make due payments. Hence, the motion for sanctions was submitted by the Chapter 11 Trustee.

According to the documents filed by AFX’s counsel on Monday, October 28, 2019, in the Motion, the Trustee seeks draconian sanctions against the defendants.

The defendants’ counsel also claims that AFX Market is in administration in London, and the license of AFX Capital was suspended by the Cyprus Securities and Exchange Commission (CySEC). According to the defense counsel, “these events have undermined the settlement, insofar as AFX’s management no longer controls AFX”.

“To the extent AFX has no operating business, it could not reasonably be expected to fund an expensive settlement”, the defense counsel says.

Counsel has also reached out to the pertinent foreign authorities. The administrator has been helpful, informing counsel that it has taken control of AFX Markets’ servers and premises, and sharing additional information. CySEC, however, has stated only that an investigation is underway, but otherwise has declined to provide information or assistance – indeed, it has even refused to provide the name of the investigator in charge.

“Ultimately, and regrettably, it would appear that the settlement failed because the AFX business failed”, AFX’s counsel argues, adding that “while it is unfortunate that failure of the settlement to date has been a result, it certainly does not provide a basis for imposing sanctions”.

Under the Complaint against AFX, throughout 2015 and 2016, Gallant Capital Markets deposited approximately $2.35 million (for its benefit) into a Gallant account maintained at AFX. Within the two-week period prior to Gallant’s commencement of its bankruptcy case, there was a balance of approximately $2.4 million in the Gallant account at AFX. Around that time, Gallant made multiple demands upon Defendants for the turnover of Gallant’s funds—all of which were disregarded.

Nevertheless, AFX withdrew the remaining balance, without authorization and without basis, on the Filing Date – in violation of the automatic stay. This case involves core issues whereby the Trustee is seeking a turnover of Gallant property and recovery of assets of the Gallant estate, and enforcement of the automatic stay.

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