Directors of Global Brokerage – the fox guarding the henhouse?

Maria Nikolova

Kenneth Grossman, Bryan I. Reyhani, and Arthur Gruen are alleged to be trying to shield their own prior misconduct from scrutiny by depriving shareholders of access to corporate documents.

The proceedings in the Chapter 11 case of Global Brokerage Inc (OTCMKTS:GLBR), formerly known as FXCM Inc, are now focusing on a derivative shareholder lawsuit brought by Brett Kandell who accuses Dror Niv, William Adhout, Kenneth Grossman, David Sakhai, Eduard Yusupov, James G. Brown, Robin Davis, Perry Fish, Arthur Gruen, Eric Legoff, Bryan Reyhani, and Ryan Silverman of breach of fiduciary duty, contribution and indemnification, waste of corporate assets, and unjust enrichment.

Why is the bankruptcy case related to the derivative shareholder litigation? In the derivative shareholder action, Mr Kandell has a derivative standing, that is, he stands in the Debtor’s shoes – he is acting in the best interests of Global Brokerage and its shareholders. As per the Confirmation Order of the Chapter 11 case, there is $75 million of Directors and Officers Insurance (D&O Insurance) and that is available in connection with the Derivative Litigation.

If the plaintiffs win the derivative shareholder lawsuit, they stand to benefit from this $75 million policy. But their actions are hampered by the directors’ refusal to produce all documents.

Let’s note that Global Brokerage is currently controlled by three of the Individual Defendants in the derivative shareholder litigation – Kenneth Grossman, Bryan I. Reyhani, and Arthur Gruen.

According to the documents submitted by Global Brokerage’s Counsel on Friday, July 20th, the company is not willing to produce all documents requested by the shareholders. In particular, the broker says it is not obliged to produce the Privileged documents, which are said to be protected under the attorney-client privilege. Global Brokerage’s Counsel explains that there are nearly 2,000 documents that the “Individual Defendants” have redacted or withheld on the basis of the attorney-client privilege.

On Friday, July 27th, Mr Kandell filed a reply in further support of his motion to compel the broker and its directors to produce the documents. Let’s recall that many of these documents focus on the Leucadia deal and FXCM’s disposal of assets to repay the Leucadia loan.

In his latest motion, Mr Kandell insists that Global Brokerage’s directors owe a fiduciary duty to the broker, not to themselves. Global Brokerage faces no liability of any kind in the derivative action.

Kenneth Grossman, Bryan I. Reyhani, and Arthur Gruen, who control the debtor are said to be attempting to thwart the prosecution of that litigation. The $75 million of D&O Insurance available in connection with the Derivative Litigation not only appear to be a valuable asset, they may be one of Global Brokerage’s most valuable assets. Indeed, a policy limits recovery in the Derivative Litigation would yield gross proceeds of nearly 150 times Global Brokerage’s present market capitalization, a substantial enhancement to the Debtor’s value and an indisputable benefit to all of its stakeholders.

Global Brokerage’s common stock, which is traded over-the-counter, closed at $0.070 on July 25, 2018, yielding a market capitalization of approximately $577,000.

Any damages recovered in the Derivative Litigation, net of legal fees and expenses, will accrue to Global Brokerage for the benefit of its stakeholders.

According to Mr Kandell, the only plausible explanation for Global Brokerage’s decision to withhold the requested documents and thus come to the aid of Kenneth Grossman, Bryan I. Reyhani, and Arthur Gruen, is that the latter control Global Brokerage, comprising its entire board of directors and Chief Executive Officer.

The assertion of privilege and failure to produce the documents, Mr Kandell warns, benefits only these three directors and is harmful to the broker and all of its other stakeholders. According to Mr Kandell, the three remaining directors of Global Brokerage seek to leverage the Debtor’s alleged attorney-client privilege solely to shield their own prior misconduct from scrutiny. Those three directors are the proverbial fox guarding the henhouse, Mr Kandell says. Their conduct is said to be antithetical to the fundamental bankruptcy policy of maximizing the value of the debtor’s estate.

The bankruptcy case of Global Brokerage continues at the New York Southern Bankruptcy Court.

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