Effex Capital, embroiled in FXCM’s US exit, finds it hard to challenge NFA publications

What is the importance of a regulatory announcement? Can information in a press release hit a business as hard as an enforcement action? These are some of the questions that arise from the regulatory publications about the settlements with FXCM reached in February 2017.

The havoc around the exit of FXCM from the US market following settlements with the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) in February 2017 seems to have waned but Effex Capital, the liquidity provider whose relationship with FXCM was at the heart of the regulatory action against the broker, continues to question the content of the regulatory publications about the settlements.

Let’s recall that in June last year, Effex Capital, the company in which FXCM allegedly had an undisclosed interest, took the NFA to Court over the announcements concerning FXCM from February 6th. Effex and its CEO John Dittami alleged that NFA overstepped its regulatory powers by including Effex’s name into the materials it published on its website about the settlement with FXCM. In addition, NFA was alleged to have disclosed Effex Capital’s trade secrets and to have caused the company harm.

In April this year, however, Judge Andrea R. Wood of the Illinois Northern District Court issued an order granting NFA’ motion to dismiss the case. The Judge noted that the case is dismissed for failure to exhaust administrative remedies. That is, before taking the matter to the Court, Effex and Dittami should have used other formal means to resolve the dispute.

According to the ruling, it is for the Commodity Futures Trading Commission, not the Court, to determine whether NFA erred in how it handled the FXCM proceeding, and whether NFA should be required to change its rules along the lines Effex suggests.

Effex and Dittami moved to appeal the Court’s decision in late April and are now pressing ahead with their arguments.

The Appellants’ Brief filed on Monday, July 16, 2018, with the Seventh Circuit U.S. Court of Appeals, states that Effex and Dittami had no administrative means to challenge the NFA publications about FXCM.

The situation is bizarre indeed, as Effex Capital wants the NFA to take down or edit the publications on its website that mention Effex. At the same time, Effex and its CEO Dittami say they are not challenging the findings made by the regulator in its investigation about FXCM.

In particular, Effex and its CEO claim that the following statements in the NFA publications are false:

• Effex was “actually the joint creation of both FXCM and Dittami”
• Effex was “supported and controlled by FXCM”
• Effex “paid rebates to FXCM that amounted at times to as much of 70% of Effex’s profits”; (d) Effex “engaged in abusive execution practices that denied FXCM’s retail customers favorable price improvement”;
• Effex was “what amounted to a dealing Desk” and profited when customers lost money;
• Effex had access to FXCM’s data from which Effex could derive customer execution and position information which Effex utilized to execute at off-market bad prices.

According to the appellants (Effex and Dittami), the District Court erroneously held that they had a right to appeal the Consent Order for two primary reasons:

• applicable law precludes appeals of consent orders; and

•  the Appellants were not parties and had no ability to intervene to become a party, which is a necessary predicate to filing an appeal of the Consent Order.

Furthermore, the District Court could not and did not cite one case in which a non-party successfully intervened post-settlement to file an appeal, according to Effex and its CEO.

The way FXCM settled the matter was crucial. Put briefly, FXCM failed to reserve the right to appeal which mooted any potential appeal and thereby precluded any ability to intervene. Also, FXCM settled the action and ceased domestic business as a result of its settlement, so any re-opening of such matter would clearly prejudice FXCM.

Effex notes that counterparts are refusing to trade with Effex and banks are refusing to provide banking services to the company, Dittami and his wife. Furthermore, several institutions have refused to enter into prime broker relationships with Effex. The company stresses the imminent need to have injunctive relief to rectify such issues.

According to the Appellants, the proceeding pursuant to a newly created, unmapped un-tested multi-step process – motion to intervene, motion for leave to appeal, motion to waive rules and then, if all succeeded, a hearing on Appellants’ contested issues – would have been extremely time consuming and by definition not designed to provide timely relief.

The case is captioned Effex Capital, LLC, et al v. National Futures Association, et al (0:18-cv-01914).