Former FXCM customers push against attempt by Effex Capital to dismiss their claims

Two interpretations of a part of the Commodity Exchange Act (CEA) have clashed in a legal case brought by former clients of FXCM against the broker, some of its top managers and its liquidity provider Effex Capital.

Whereas Effex Capital and its CEO John Dittami argue that the CEA precludes the plaintiffs from bringing such an action, the plaintiffs disagree with such a statement.

According to the latest filings with the New York Southern District Court, the parties in the case clash over 7 U.S.C. § 2(c). Effex and Dittami say that the section in question does not extend to cover Eligible Contract Participants (ECPs) in transactions such as Effex to FXCM.

But the former customers of the broker say that the defendants’ new argument appears to be that while the CFTC has jurisdiction to bring enforcement actions in retail forex transactions, an individual’s unambiguous statutory right to bring a private cause of action under the same statutory provision does not include such retail forex transactions.

The plaintiffs explain that, as per the regulations, an individual damaged by fraudulent or deceitful acts in transactions involving a contract of sale of any commodity for future delivery (or option on such contract or any commodity) has a private cause of action under CEA §§ 4b(a)(2)(A) and (C), 7 U.S.C. §§ 6b(a)(2)(A) and (C). Pursuant to 7 U.S.C. § 2(c), which covers “Agreements, Contracts, and Transactions in Foreign Currency . . . ,” the anti-fraud provisions “shall subject to the two conditions below apply to an agreement, contract, or transaction in foreign currency,” “as if the agreement, contract, or transaction were a contract of sale of a commodity for future delivery.”

That is, the CEA makes clear that fraud claims brought “under this chapter” extend to retail forex transactions.

According to the plaintiffs, Effex’s assertion that the statute does not extend to cover Eligible Contract Participants in transactions such as Effex to FXCM is completely beside the point. ECPs are persons subject to regulation under Chapter 7, the plaintiffs insist.

The former customers note that

“There is no basis—in logic, the drafting history of the CEA, or the public policy underlying it—for Defendants’ assertion that Section 6b does not bar recovery for retail forex fraud when claims are brought by the CFTC, but does bar recovery for retail forex fraud when claims are brought by individual investors”.

Let’s recall that the case in question is brought by Vantalie Nguyen, Hien Tran, Quynh Pham, Arthur P. Cardi, and Bikram Randhawa – former customers of FXCM Inc, now known as Global Brokerage Inc (OTCMKTS:GLBR).

The plaintiffs have brought the action on behalf of themselves and all other former customers of FXCM Inc; Forex Capital Markets, LLC; and FXCM Holdings, LLC, in an effort to recover the damages they and the Class suffered as a result of the alleged fraud perpetrated by Effex Capital, Dittami and FXCM. The customers say they were led to believe that FXCM provided a conflict-free retail Forex trading platform, whereas, in fact, the opposite was true: FXCM had a hidden relationship with Effex, which held positions opposite to orders placed by the Class and could (unlike other liquidity providers) view non-public details of those orders, and then engaged in abusive practices—all to the benefit of Effex, Dittami and FXCM.

The plaintiffs argue that Effex was central to this misconduct, as it was the secret liquidity provider that FXCM was penalized for concealing from its customers. Effex and Dittami should be held responsible for the damages they caused to the Class during the seven-year Class Period—which far exceed those identified by the CFTC, according to the ex-clients of the broker.

The plaintiffs stress that Effex deprived them of positive slippage and gave them negative slippage—when it would benefit Effex’s and FXCM’s bottom line. Two of the most egregious practices were the Hold Timer, and Previous Quote functions. Effex used both of these abusive practices to harm FXCM’s customers. Furthermore, all trades that were routed to Effex were denied best execution and the possibility of a better price—i.e. positive slippage—because the other liquidity providers were not allowed to compete to provide a better price to the traders.

The plaintiffs insist that Effex and Dittami knew FXCM intended to violate the CEA because they operated hand-in-glove. Also, without Effex’s participation, FXCM could not have violated the CEA. Because FXCM created Effex to secretly trade against its customers, Effex did more than “provide normal clearing services to a primary broker.”