Effex Capital, embroiled in FXCM’s US exit, loses appeal in case against NFA

Effex Capital, the company embroiled in the exit of FXCM from the US retail FX market, has suffered a defeat at the Seventh Circuit U.S. Court of Appeals in a case alleging the National Futures Association (NFA) defamed it in its press release about proceedings against FXCM.

On August 13, 2019, the Seventh Circuit U.S. Court of Appeals issued Final Judgment affirming the District Court’s ruling in the case. Put briefly, the Court of Appeals sided with the District Court in that Effex Capital had not exhausted all administrative remedies available to it before taking NFA to Court.

Effex Capital, LLC launched an action alleging that NFA had defamed it in documents related to a settlement between the NFA and one of its members, Forex Capital Markets, LLC (FXCM).

Let’s recall that the NFA initiated an investigation into an association member, FXCM, and found that the company had engaged in several practices that violate the NFA’s rules. FXCM chose to settle with the NFA, and on February 6, 2017, the NFA released several documents related to the settlement. These documents include: (1) a complaint setting forth the NFA’s allegations against FXCM; (2) a decision by the NFA Business Conduct Committee finding that FXCM committed the violations outlined in the complaint and de‐ tailing the terms of a settlement between the NFA and FXCM; (3) a publicly accessible narrative summarizing the decision; and (4) a press release announcing the decision and directing the public to the narrative posted on the NFA’s website.

The NFA’s complaint against FXCM alleged that FXCM failed to comply with a litany of NFA rules. In particular, the NFA claimed that Effex was involved in the misconduct allegedly committed by FXCM. The resulting decision outlined the allegations in the complaint, including those involving Effex, and accepted them as true. The accompanying narrative summarized the decision, including its statements about Effex. The press release, although it did not specifically reference Effex, noted that FXCM committed numerous deceptive and abusive actions and directed the public to the narrative on the NFA’s website. Effex alleged that the NFA’s findings in the FXCM Settlement Documents are false and that their publication is defamatory.

Effex did not seek review of either the NFA’s decision or the Commission’s decision regarding FXCM. Rather, four months after the decisions were released, Effex filed this action against the NFA in the district court.

Effex sought injunctive relief, asking for an order requiring the NFA to remove the FXCM Settlement Documents from its website, to delete all references to Effex, or, alternatively, to provide Effex with a “name clearing hearing.” It further requested an order compelling the NFA to “issue a new press release stating: (a) NFA did not make any findings against Effex or Dittami; (b) Effex was not a de facto dealing desk of FXCM; (c) Effex was not controlled by FXCM; and (d) FXCM was not ordered to make any customer restitution.” Effex also asked for money damages of $10,000,000 for lost profits and to redress its constitutional injury.

The district court dismissed Effex’s Complaint. Effex timely appealed.

In affirming the District Court’s ruling, the Court of Appeals notes that the NFA’s discipline of its own members is a specific and central element of the role Congress delegated to SROs in its regulation of the commodities futures market.

If a member could challenge the NFA’s discipline and disciplinary process through a state‐tort claim, the NFA’s capacity to discipline its members- here, FXCM- for violating its rules would be impaired significantly. State courts effectively could supervise the NFA’s regulation of its members and thus impede its federally mandated role in the Commodity Exchange Act’s overall scheme. The resulting obstacle to Congress’s purposes in creating federal regulations overseeing the national commodities futures market is obvious.

Allowing suits against the NFA arising out of the NFA’s disciplinary actions would present a serious obstacle to the NFA’s ability to carry out its regulatory duties, especially where there are administrative remedies available.

Effex claims, in essence, that the NFA improperly conducted its disciplinary proceedings. It does not matter whether Effex is a member or nonmember of the NFA or a party or nonparty to the proceedings.

“Permitting a collateral attack on those proceedings based on Effex’s tort claims would impair the NFA’s ability to enforce its rules and carry out its regulatory role”, the Court says.

The CFTC has filed an amicus brief outlining its view on whether a nonparty can seek review of an NFA disciplinary procedure or otherwise seek redress before the Commission. The Commission said that although nonparties do not have a right to CFTC review of an NFA action that implicates them, the Commission does have the discretion to permit nonparties to obtain CFTC review in extraordinary circumstances. The district court was of the view that nonparties also have the right to CFTC review through intervention or by asking the CFTC to review a matter sua sponte.

The Court of Appeals says it does not believe it appropriate for it to delineate in any definitive way the administrative paths that may be open to Effex. It is not at all clear that Effex will choose to pursue the administrative remedies that may be open to it.