The dog that didn’t bark – FXCM and the regulators

Maria Nikolova

“It’s not my burden to put in evidence that regulators sat by idly,” FXCM attorney says.

More than two weeks have passed since the latest US regulatory action against Forex Capital Markets LLC has prompted its exodus from the US retail FX market, due to the fact that the broker got prohibited from NFA and CFTC membership.

One of the consequences from the settlements between FXCM and US regulators was a hit on investors’ confidence in the broker and the FX industry in general, as well as a steep price drop of the shares of FXCM Inc, which is now named Global Brokerage Inc (NASDAQ:GLBR). Shortly after the US regulatory findings into FXCM’s practices were published, invitations to join class action lawsuits against the broker and its principals started piling up.

This reminded us of the situation from January 2015 when such lawsuits were launched against FXCM following (again) a steep drop in the share price prompted by a heavy loss triggered by the SNB decision to unpeg the CHF.

Interestingly, it is one of the legal cases against FXCM linked to January 2015 events that raised a very important question that has resurfaced again in February 2017. That is: Why were the regulators silent for such a long time?

The question was not initially raised by FinanceFeeds. It was raised by Vice Chancellor Sam Glasscock III at a Delaware Chancery Court in February this year, according to a report by Law360. The case (number 11812) is Brett Kandell v. Dror Niv et al., and concerns whether the broker’s directors were aware of regulatory violations when the company’s capital fell below necessary levels in January 2015.

Here is how the dialogue between the Vice Chancellor and FXCM’s attorney Kenneth J. Nachbar of Morris Nichols Arsht & Tunnell LLP went, according to Law360:

“Asked by the vice chancellor to cite evidence that regulators never flagged the company for its advertising practices and investor assurances of loss limits, Mr Nachbar said, “It’s the dog that didn’t bark.”

“It’s not my burden to put in evidence that regulators sat by idly,” he said.”

Now, this is a heavy accusation, referring to the famous Sir Arthur Conan Doyle and his short story “Silver Blaze,” where Sherlock Homes solves the mystery because he notices that no one he spoke to in his investigation mentioned that they had heard barking from a watchdog.

Dogs don’t bark at those they know and trust.

It is weird, indeed, that for so many years the US financial watchdogs were silent about what was going on at FXCM. Yes, the regulatory announcements refer to FXCM having made misleading statements to NFA staff. But this continued for at least five years, with no one having checked that earlier.

The silence (the lack of barking) of non-US regulators at this point is also alarming, because traders are now suspicious of FXCM non-US activities and have only the official corporate press releases to get information from.

In the US, according to data sourced from Law360 database, there are at least three cases against FXCM Inc after the February 6th, 2017 events – each of the three cases cites FXCM Inc, Dror Niv and Robert Lande as defendants, with the motions brought up in the New York Southern Court by the Rosen Law Firm, Pomerantz LLP and Levi & Korsinsky.

It is obvious that while FXCM Inc considers its US regulatory obligations settled, the legal fights are just beginning.

More interestingly, we have yet to see whether there will be changes to US Forex regulations following the recent revelations regarding FXCM. The SNB event and the consequences for what was one of the biggest retail FX firms in the US forced regulators to reconsider margin requirements. What’s next? Moreover, to whom will any new regulations apply, given the tiny number of FX market participants left in the US?

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