Drew Niv need not be clairvoyant, FXCM argues in NY court

“There was no reasonable basis for Niv to conclude that the SNB would abruptly end its 1.20 cap for the EUR/CHF currency pair”, attorneys for Drew Niv and FXCM Inc, now known as Global Brokerage Inc (NASDAQ:GLBR), have argued.

On Thursday, September 28, 2017, the defendants have filed a motion to dismiss the second amended complaint brought against them in a case captioned International Union of Operating Engineers Local No. 478 Pension Fund v. FXCM Inc. et al (1:15-cv-03599).

As FinanceFeeds has earlier reported, this is a securities fraud class action brought on behalf of all purchasers of FXCM common stock between March 17, 2014 and January 20, 2015. During the Class Period, Plaintiff and the Class purchased FXCM securities at allegedly artificially inflated prices. When FXCM’s and Niv’s alleged misrepresentations were revealed and the information once concealed from the market was unravelled, the price of FXCM’s securities significantly declined, causing investors’ losses. The Defendants’ conduct is said to have caused an economic loss to the Plaintiff and the Class.

The plaintiffs claim that FXCM and its executives knew of the risk the company and the customers faced due to an eventual SNB action to remove the EUR/CHF peg. According to them, the “Black Swan” label was merely a… label.

• The meteorite

The latest court filings by FXCM and Mr Niv’s attorneys show that the defendants would not give up without a fight. In fact, we should admit that their defense is, as usual, detailed and rather colorful. One example is the referral to a National Geographic story about a meteorite crash, with FXCM’s defense seeking to establish an analogy with the January 15, 2015 events.

“In 1954, a meteorite crashed through the top of a house in Alabama, bounced off of the living room radio, and injured the hip of Mrs. Elizabeth Hodges, who was sleeping on the couch. The fact that this rare event occurred does not mean that Alabama suffers from an undisclosed high risk of damage from falling space rocks, or that Mrs. Hodges should have constructed a meteorite barrier on her roof.”

“Low-probability events occur all the time, and their mere existence says nothing about the degree of risk posed to a homeowner—or to a company”, FXCM’s attorneys argue.

In fact, one of the main arguments in the documents filed by the defendants is that there was no way that Drew Niv could have predicted the SNB decision.

• Corporate officials need not be clairvoyant

The defendants argue that Mr Niv should not be liable for securities fraud merely because he failed to predict the timing, manner, and impact of the SNB’s surprise decision to remove the 1.20 cap for the EUR/CHF currency pair on January 15, 2015. According to the defendants’ attorneys, the question is not whether Mr Niv knew that the SNB would remove the cap at some future point in time, but whether he knew that such removal was imminent and that the SNB would remove the cap in a manner that would cause unprecedented price movement.

“Corporate officials need not be clairvoyant”, the attorneys quote an argument from another case.

• But other brokers raised the margins…

With regards to actions by Saxo Bank and Gain Capital to raise the margins on CHF pairs several months before the SNB decision, FXCM attorneys note that margin requirements were not raised by dozens of other financial institutions that were actively involved in trading EUR/CHF pair. Different companies took two different views about risks and how to adjust their exposure is hardly evidence sufficient to impute scienter (of Mr Niv – Ed.), the attorney’s quote an earlier court statement.

• The risk warnings in Europe

The plaintiffs have referred to the testimony of CW1 (confidential witness 1), formerly employed as FXCM Managing Director in Germany from the start of the Class Period through December 2014.

The witness has explained that following Gain’s and Saxo’s announcements in September 2014 about leverage reduction on CHF pairs, there was a significant and almost immediate influx to FXCM of retail customers that had previously traded through the Gain and Saxo platforms. CW1 described how, in late 2014, he and other FXCM officers had warned Brendan Callan, back then – the FXCM CEO of Europe, and Niv’s direct report for Europe’s operations, about the massive risks of the EUR/CHF customer accounts.

The defendants argue, however, of lack of evidence that Mr Callan reported any of CW1’s concerns to Niv, and that the Court should disregard CW1’s allegations.

Moreover, “scienter cannot be imputed to executives on the basis of the existence of one minority opinion within a company”, according to the defense.

• The losses

According to the defendants, the reason FXCM sustained losses that resulted in an undercapitalization on January 15 was not because of the size of its customers’ open positions in the EUR/CHF pair, but rather the combination of exceptional volatility and a near suspension of market liquidity.

“Had there been available market liquidity, FXCM would have been able to close out its customer’ open positions in the EUR/CHF pair before their balances went negative”, FXCM’s attorneys argue.

Mr Niv wrote in a February 11, 2015 email that “Citibank and Deutsche Bank . . . had ‘NEVER turned us off’”, but the attorneys explain that the email statements by Mr Niv referred to the fact that, despite outstanding margin calls, these two banks did not shut down their prime brokerage accounts with FXCM or refuse to trade with FXCM on January 15. That is different, the document says, from whether these two banks actually provided a constant stream of liquidity free from price gaps and erratic movement in the EUR/CHF currency pair that would be available to FXCM customers wishing to close out their positions during the SNB Flash Crash.

• The leverage

One more interesting remark that the defendants make in their motion to dismiss. FXCM, of course, seeks to defend its margin policy and notes that it complies with margin requirements in markets where it operates. But it also says:

“It is well-understood in the market that the FX industry relies on heavily leveraged trades—currency pairs change price so gradually that traders necessarily rely on high leverage to realize gains.”

The plaintiffs have until October 31, 2017, to reply to the arguments of Mr Niv and FXCM.

Image credit: National Geographic.