Appeals Court refuses to revive black swan lawsuit against FXCM Inc

Maria Nikolova

Allegations about Drew Niv’s and FXCM’s representations of FXCM’s business model amount to no more than “fraud by hindsight”, the Second Circuit U.S. Court of Appeals rules.

As reported by FinanceFeeds in August last year, the plaintiffs in lawsuit related to the events from January 15, 2015, challenged a ruling by the New York Southern District Court that dismissed the complaint against FXCM Inc, now known as Global Brokerage Inc (OTCMKTS:GLBR), and Drew Niv.

Judgment Mandate issued by the Second Circuit U.S. Court of Appeals on May 9, 2019, includes a Summary Order which affirms the judgment of the district court. Put otherwise, the “black swan” case against FXCM and its former head will not be revived.

The plaintiff in the case – the Retirement Board of the Policemen’s Annuity and Benefit Fund of Chicago on Behalf of the Policemen’s Annuity and Benefit Fund of Chicago, is an institutional investor that purchased FXCM common stock from March 17, 2014, up to and including January 20, 2015. It brought this putative class action on behalf of all those who purchased or otherwise acquired FXCM stock during the Class Period and were damaged thereby.

The plaintiff had alleged, specifically, that FXCM and Niv misled investors about the risks associated with FXCM’s business, especially with respect to the risks associated with FXCM’s “agency model,” FXCM’s leverage policies, and FXCM’s exposure to massive losses if the Euro were de-pegged from the Swiss Franc.

The Appeals Court, however, has sided with the defendants. In the summary order, the Appeals Court states that it agrees with the district court that the plaintiff has not alleged facts amounting to a strong inference of scienter.

According to the Court, the plaintiff makes no argument as to any motive to defraud on the part of Defendants-Appellees FXCM, Inc. and Dror Niv. Instead, the plaintiff focused on, inter alia, how Niv “falsely described the risks inherent in FXCM’s business” as well as the risk FXCM took by holding such a large position in the EUR/CHF currency pair.

Allegations about Defendants’ representations of FXCM’s business model amount to no more than “fraud by hindsight”, the Court says.

The plaintiff is said to be relying on statements by analysts and other market participants in the wake of the shock caused by the Swiss National Bank’s move to de-peg the Franc from the Euro that they did not fully understand the risks that FXCM was taking. But such allegations, the Court argues, do not constitute strong circumstantial evidence of conscious or reckless conduct on the defendants’ part when, according to the plaintiff’s own complaint, the SNB’s decision to de-peg and its attendant consequences were themselves deemed by the market to be a “black swan-like” event.

Furthermore, allegations as to past volatile currency events or the large reductions in FXCM’s capital they caused “weigh against a finding of scienter,” as they “show that FXCM’s model was able to withstand high-volatility events.”

The fact that several of FXCM’s competitors changed their margin policies on the EUR/CHF pair in the months leading up to the de-pegging while FXCM did not, cannot itself raise a strong inference of scienter on the part of the defendants, the Court states.

Although the Court agrees with the plaintiff that the defendants must have known that, as the SNB’s peg of the Franc to the Euro was temporary, it would be lifted at some point and the Franc’s price would necessarily change. However, the Court disagrees that it thus follows that Niv necessarily knew of the “potentially crippling consequences” such an event could cause for FXCM.

Further, the Appeals Court finds that the plaintiff’s allegations about a “cover up” following the de-pegging do not suffice to create a strong inference of scienter either. Plaintiff attempts to make much of several “contradictions” in statements in emails and to the Commodity Futures Trading Commission about the sort of losses FXCM suffered and whether FXCM experienced liquidity failures during the crash. However, to the extent these statements are even contradictory (which, as the district court pointed out, they may not be), this “does not make it more likely that before January 15, 2015, Niv considered the de-pegging of the Euro and the Franc a serious risk, and lied to investors about that risk.”

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