Exclusive: AFX Group's profit sharing antics result in Gallant's trustee suing them in New York - Full research by FinanceFeeds - FinanceFeeds

Exclusive: AFX Group’s profit sharing antics result in Gallant’s trustee suing them in New York – Full research by FinanceFeeds

AFX Group was profit sharing, and its debt to Gallant Capital Markets created enough damage to bankrupt the company, meanwhile brokers which had deposited funds with AFX on the grounds that it was processing them to liquidity providers in a live market were unable to withdraw. FinanceFeeds investigated this a year ago, and was met with aggression and spurious phone calls from unrelated parties. Here is the absolutely comprehensive extent of our research.

Almost a whole year has passed since the high profile and extremely damaging demise of Gallant Capital Markets after it filed for Chapter 11 bankruptcy in New York.

The demise of Galant Capital Markets opened up a massive question with regard to how retail brokerages should assess the execution model and liquidity relationships held by the prime of prime that serves them, with FinanceFeeds absolutely maintaining that retail FX firms should not work with a prime of prime unless they are certain that it is an actual prime of prime and operates according to correct liquidity management principles.

Prime of prime brokerage is a term that has become increasingly used at the very forefront of the non-bank electronic derivatives business over recent years.

It is quite possibly the most central and integral part of the retail FX and multi-asset trading ecosystem, bearing in mind that no other method of facilitating live, real time and completely liquid access to global markets where any asset whatsoever can be traded, priced immediately with millimetric precision and offered to a retail audience at a very low price, exists.

Prime of prime brokerage has elevated the non-bank electronic trading sector to such levels that London’s transformation from a stock and equities mainstay in the 1980s has completely given way to it prominence as the world’s largest institutional and interbank FX center, with 49% of all interbank order flow going through Canary Wharf’s Tier 1 banks, and whose electronic communication networks (FXall and Currenex have vast business in London) nestle among giant commodities brokers and non bank prime of prime liquidity providers, all of which bear no relation whatsoever with – and conduct absolutely no business with – any listed derivatives exchange.

This enormous and finely honed market is the darling of retail electronic trading customers and institutional prop desks globally, its connectivity via ultra-efficient hosting centers in New York, London (Well, Slough!), Tokyo and Hong Kong processing tens of thousands of spot trades per minute with complete accuracy and knocking the clunking abilities of the exchanges, which are unable to match the efficiency of the OTC market but are also vastly expensive in terms of clearing fees and membership cost.

It is therefore an extremely important moot point that certain non-bank firms market themselves as liquidity providers and prime of primes, when actually they are engaging in profit sharing and lodging capital with other B-book brokerages, thus not adhering to best execution practices stipulated by various regulatory authorities, including those set out in MiFID II, which is the infrastructural framework under which AFX Group, the subject of our research in this case, has to operate.

What could AFX Group, a retail brokerage regulated in Cyprus and Britain, have to do with Gallant Capital Markets?

In May last year, when Gallant Capital Markets went belly up, FinanceFeeds became aware of an entry on the bankruptcy court filings in the name of AFX Group to the tune of $2.4 million, demonstrating that the firm had been lodging the capital deposited by its broker clients with Gallant Capital Markets on a profit sharing arrangement instead of holding it in a custodian account and transferring trades to live liquidity via bank relationships.

As a result of some detailed research in North America, FinanceFeeds can now conclude quite categorically that the trustee of the bankruptcy case surrounding Gallant Capital Markets has now instigated a lawsuit against AFX Capital Markets LTD., AFX Capital U.S. Corp. and STO SUPER TRADING ONLINE, in the form of an adversary proceeding which is being brought to recover sums due the debtors by defendants or to avoid and recover transfers made by Gallant to Defendants or funds improperly withheld by Defendants and which is due to Gallant.

Thus, it can be read that the litigator is insinuating that AFX Group’s debt had a material effect on the demise of Gallant Capital Markets.

Before analyzing the gravity and detail of this case, it is important that a few surrounding matters are explained.

In May last year, when FinanceFeeds began investigating this matter, we were inundated with a series of telephone calls from somewhat unrelated parties, urging us not to probe the matter, those being completely unrelated companies in Cyprus, including one marketing and events company and another being a binary options technology firm.

Why on earth would our investigation be of any significance to those outside the matter itself? On further investigation, it can be deduced that AFX Group has been spending a lot of money in Cyprus on frivolous activities set up by Cyprus-based events management firms, which is not a good look when you consider that this now turns out to be customers and brokers money.

At the same time, a very stern and aggressive telephone call was received by FinanceFeeds from AFX Group, threatening to take action should we publish any adverse information about the company.

FinanceFeeds response was to ask to sign a non-disclosure document and visit the offices of AFX Group and look at the books, to be certain that the alleged withdrawal issues experienced by brokers and the alleged profit sharing and debt to Gallant were rumors and then publish accordingly, however upon arrival at AFX Group’s London offices, we were met by a heavily tattooed junior member of staff who told us verbally the company’s side of the story and did not show us any official documents to support their claims that the money was not outstanding and that there were no issues with brokers withdrawing.

If this is the sort of guff being fed to those investigating, who knows what customers (retail brokers) are on the receiving end of.

Now, at the beginning of this month, litigation has commenced against AFX Group in the United States Bankruptcy Court of the Eastern District of New York, led by Esther Duval, who is Chapter 11 Trustee of the estate of Gallant Capital Markets Ltd, determining that FinanceFeeds original research was indeed correct.

On or about November 13, 2014, Gallant and AFX Capital Markets entered into a client account agreement entitled “Terms and Conditions for Eligible Counterparties and Professional Clients”, clearly demonstrating a profit sharing arrangement rather than a method of transferring broker trades to market.

On March 20, 2015, AFX Capital Markets and Gallant amended the Client Agreement under the terms of the AFX capital risk share agreement (referred to by the court as the “Capital Risk Share Agreement”), in which the parties agreed to enter into a revenue sharing arrangement.

Under the Capital Risk Share Agreement, Capital Revenue is determined by analyzing the amount of realized profit/loss during each calendar month in Gallant trading account(s) owed to Gallant by AFX.

AFX Capital Markets and Gallant agreed that payment of AFX Revenue would be conducted on a monthly basis, with payment, if any, being made no later than 30 calendar days following the last day of the month.

Relevant Transactional History Between Gallant and AFX Capital Markets

Upon execution of the Client Agreement, an account in the name of Gallant was opened at AFX Capital Markets (referred to by the court as the “Gallant Account”).

Since the execution of the Client Agreement, Gallant had multiple Gallant Account numbers beginning with an account number ending in 674.

The last account number of the Gallant Account ended in 276. All transactions referenced herein in the year 2015 in the Gallant Account took place in account number ending in 674.

All transactions referenced herein between the years 2016 and 2017 in the Gallant Account occurred in account number ending in 276.

In accordance with the Client Agreement, Gallant deposited an aggregate amount of $2,349,896.12 into the Gallant Account, for its benefit, at AFX Capital Markets as follows:

i. $149,988.00 on April 23, 2015;
ii. two deposits each in the amount of $249,988.00 on June 8, 2015;
iii. $199,988.00 on July 2, 2015;
iv. $499,981.46 on November 21, 2016;
v. $499,981.39 on November 23, 2016;
vi. $499,981.27 on December 20, 2016.

On a daily basis, AFX Capital Markets emailed Gallant the same day, or prior day, trading activity and its account balance in STO AFX Daily Confirmation Reports.

When questioned about these amounts last year by FinanceFeeds, AFX Group stated that this is a simple dispute with a customer and any small amount could easily be paid. Quite clearly, it cannot be and is now not only the subject of a bankruptcy lawsuit but also a clear indicator as to why brokers could not withdraw from AFX Group when they struck up their arrangements on the basis that they thought they were working with a prime of prime brokerage/institutional liquidity provider.

On March 14, 2017 (30 days prior to the Filing Date), according to the STO AFX Daily Confirmation Report emailed to Gallant by AFX Capital Markets, Gallant’s account reflected a balance of 1,727,733.69.

The following day on March 15, 2017, according to the STO AFX Daily Confirmation Report emailed to Gallant by AFX Capital Markets, the Gallant Account reflected a balance of $2,355,378.42.

On March 30, 2017 (two weeks prior to the Filing Date), according to the STO AFX Daily Confirmation Report emailed to Gallant by AFX Capital Markets, the Gallant Account reflected a balance of $2,391,869.87.

Gallant’s Pre-Petition Demand for Its Money

In an email dated April 3, 2017 from Buccellato, the CEO of Gallant, to Persichino, the Executive Director of AFX, Gallant made an initial request for a withdrawal from its Gallant Account to a separate Gallant account in the amount of $1,500,000.00 (the “April 3 2017 Demand”).

On the date of the April 3, 2017 Demand, according to the STO AFX Daily Confirmation Report, there was a balance of $2,472,421.41 in the Gallant Account. The lawsuit states that AFX never remitted the funds.

On April 5, 2017, since Gallant did not receive the money, it made a second request for the withdrawal of $1,441,217.10 (the “Second Demand”). On the day of the Second Demand, the Gallant Account reflected a balance of $2,472,016.28.The lawsuit states that AFX never remitted the funds.

On April 24, 2017, Buccellato, the CEO of the Debtors executed a declaration before this Court, sworn under penalty of perjury, stating that “Gallant has sustained substantial financial difficulty due to the unforeseen actions of its main counter-party, AFX Capital Markets, a company registered with the Cyprus Securities and Exchange Commission (CySec).

That unforeseen counter-party’s actions have resulted in significant default on obligations owed to Gallant and has had the effect of restricting Gallant’s ability to trade and do business. Furthermore, this counterparty default resulted in material financial difficulties that triggered Gallant’s insolvency on or around 14 April 2017.

Specifically, the lawsuit states that AFX has failed to process a redemption request submitted by Gallant in excess of USD 2,000,000. Gallant’s redemption request was entirely ignored by AFX despite numerous written and verbal requests.

In addition to this counterparty default, which was in fact Gallant’s primary and most important counterparty, Gallant was unable to provide liquidity services to its own clients. As a result, to protect its assets including customer accounts, Gallant ceased trading at 17:00 hours on 14 April 2017 and filed for chapter protection immediately thereafter”.

Trustee’s Investigation Reveals Unauthorized Transfers by AFX from Gallant Account

Based upon the Trustee’s review of the Debtors’ records, several unauthorized transfers by AFX of Gallant’s property has come to light. On April 6, 2017 (8 days from the Filing Date), AFX, without authorization, made 4 withdrawals (the “Withdrawals”) from the Gallant Account as follows:

i) $114,554.20, purportedly representing 50% of Gallant’s positive profit/loss (negative AFX revenue calculation) for January, 2017;
ii) $530,442.80, purportedly representing 50% of Gallant’s positive profit/loss (negative AFX revenue calculation) for February, 2017; Case 1-18-01038-ess Doc 1 Filed 04/02/18 Entered 04/02/18 18:10:56
iii) $381,745.20, purportedly representing 50% of Gallant’s positive profit/loss (negative AFX revenue calculation) for March, 2017; and
iv) $2,024.20, purportedly representing 50% of Gallant’s positive profit/loss (negative AFX revenue calculation) for April, 2017.

The Withdrawals total $1,028,766.40, which purportedly represented four months of positive profit/loss owed by Gallant to AFX under the Capital Risk Share Agreement. 

There are five claims against all defendants being made in the bankruptcy court for relief.

At all times relevant, Gallant was a provider of foreign exchange technologies and services to private and institutional traders. Gallant registered its business at 3170 Nemours Chambers Road, Tortola, British Virgin Islands, but used a mailing address as 5068 44th Street, Woodside New York 11377.

At all times relevant, Avenica provided services and technical support to Gallant and had its principal places of business located at 48 Wall Street, Floor 11, New York, New York 10005 and 85 Broad Street, 16 Floor, New York, New York 10004. Salvatore Buccatello (“Buccatello”) held 100% of the membership interest in Avenica and was the CEO of both Debtors, and STO is a trade name of AFX.

AFX Group has been a sponsor of several parties to the tune of significant sums which have been demonstrated to us by the US based auditors with whom we conducted research, which may explain some of the spurious telephone calls received by FinanceFeeds by unrelated parties in Cyprus when we initially began investigating this matter, as it is not a good combination of visuals when a firms sponsors lavish parties with the funds which were supposed to be transferred to a live market and now cannot pay withdrawals to its brokers.

With regard to looking for liquidity partnerships for retail FX brokerages, FinanceFeeds cannot stress enough – there are only a handful of real prime of primes in the market, hence absolute due diligence should be performed when striking up liquidity relationships.

FinanceFeeds has all research and signed litigation documents, all sealed by the US Bankruptcy court in New York in original form and will retain them on file for research purposes.

Mind how you go.

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