Former FXCM directors & officers under fire over withholding documents

Maria Nikolova

A number of former directors and officers of FXCM refuse to produce a heavy set of documents to the broker’s shareholders.


The planned closure of the bankruptcy case of Global Brokerage Inc (OTCMKTS:GLBR), formerly known as FXCM Inc, hinges on the developments in a derivative shareholder lawsuit launched by Brett Kandell.

Mr Kandell claims that the case he brought against a number of current and former directors and officers of the Debtor: Dror Niv, William Adhout, Kenneth Grossman, David Sakhai, Eduard Yusupov, James G. Brown, Robin Davis, Perry Fish, Arthur Gruen, Eric Legoff, Bryan Reyhani, and Ryan Silverman, has been hampered due to their refusal to produce a set of documents related to the prosecution.

The Individual Defendants (that is, the FXCM directors and officers just mentioned) now attempt to assert (or direct Global Brokerage to assert) that certain documents that belong to the broker, but that are in the possession of the Individual Defendants and/or their counsel, are shielded from discovery. Put simply, the FXCM directors and officers refuse to provide the requested information to the shareholders of the company.

(“FXCM”, as the term is used in Court filings, means Global Brokerage Inc. f/k/a FXCM, Inc. and (a) any of its partners, parents, predecessors, divisions, branches, subsidiaries, affiliates, parent companies and any of their past or present directors, boards of directors, committees, officers, agents, employees, representatives and attorneys; and (b) any other person or entity purporting to act on their behalf.)

  • What are the documents requested?

All documents and communications since 2010 concerning:

  • CFTC Actions. These include any actions brought by the CFTC against FXCM alleging any violation of Regulation 5.16 including, but not limited to, the August 18, 2016 enforcement action commenced by the CFTC;
  • CFTC Consent Orders. This means any order entered into between the CFTC and FXCM including, but not limited to, the order providing that FXCM will pay a $650,000 fine to the CFTC for, among other things, violations of Regulation 5.16 and/or its Zero Debit Policy;
  • Flash Crash (the January 15, 2015 events);
  • Leucadia Loan;
  • MOU, that is, the amendment to the Leucadia Loan that (a) extended FXCM’s time to pay off the Leucadia Loan by one year and (b) permitted Leucadia to acquire 49.9% of the Company’s outstanding common stock.
  • Regulation 5.16. This means 17 C.F.R. §5.16 of the Dodd Frank Wall Street Reform and Consumer Protect Act which provides that: “No retail foreign exchange dealer, futures commission merchant or introducing broker may in any way represent that it will, with respect to any retail foreign exchange transaction in any account carried by a retail foreign exchange dealer or futures commission merchant for or on behalf of any person: (1) Guarantee such person against loss; (2) Limit the loss of such person; or (3) Not call for or attempt to collect security deposits, margin, or other deposits as established for retail forex customers.”
  • Regulation 5.7. This means 17 C.F.R. §5.7 which provides companies a ten-day extension if they can demonstrate that they are able to comply with capital requirements.
  • Zero Debit Policy. This means the policy enacted by FXCM providing that the Company will not hold traders of FX responsible for deficit balances as a result of trading.

This list is not exhaustive, as Mr Kandell has also requested minutes, notes, presentations, slide decks or any other record of the substance of any meeting of the Board, any other Board committee at which each or any of these matters were addressed, referenced or discussed since 2010.

The requests also concern the documents sufficient to identify when Leucadia commenced discussions with FXCM regarding the Flash Crash, the Leucadia Loan, and the MOU, as well as documents sufficient to identify when POINT72 (i.e., Steve Cohen) commenced discussions with FXCM regarding the Flash Crash and the Leucadia Loan.

The requests also cover documents relating to FXCM’s SEC filings concerning the Flash Crash, Leucadia Loan, the MOU, Regulation 5.16, and the Zero Debit Policy during the Relevant Period, including drafts of such filings, as well as documents concerning any sale of FXCM assets by FXCM to pay for the Leucadia Loan and/or the MOU.

Mr Kandell also demands access to documents sufficient to identify the personal net worth of each director, as well as access to documents sufficient to identify the equity in FXCM and the percentage ownership of such equity held by Leucadia and the FXCM directors and officers that are defendants in the action.

  • What was the reaction of FXCM’s directors and officers?

They are withholding a heavy part of the requested documents, arguing that the shareholders do not have the legal right to access them just because they are shareholders. The withheld documents are said to be protected from disclosure by the attorney-client privilege.

  • What’s next?

Mr Kandell argues that the defendants, allegedly in concert with the broker, are attempting to impede the effective prosecution of the Derivative Litigation. According to him, the requested documents do not belong to the individual defendants but to the broker and, hence, shareholders should have access to the information.

Mr Kandell wants the Court to direct the individual defendants in his case and the Debtor (that is, Global Brokerage) to produce the withheld documents. A hearing is scheduled for July 17, 2018.

  • The derivative shareholder lawsuit

Mr Kandell alleges causes of action against the Individual Defendants for various breaches of their fiduciary duties to FXCM, indemnification and contribution, waste, and unjust enrichment.

Count I alleges that the Defendants breached their fiduciary duties of loyalty and care by allowing the Company to violate Regulation 5.16; approving the Leucadia loan, the severance agreements and bonus plans, and the Rights Plan; failing to obtain the services of a financial advisor to opine on the merits of the Leucadia loan or other debt financing options; and exposing the Company to undue risk.

Count II is brought against the insider defendants (Niv, Sakhai, Adhout, Yusupov, and Grossman) for breaching their fiduciary duties by “causing the Company to enter into the Leucadia Loan and the MOU, despite the fact that the terms of the Leucadia Loan were grossly unfair to the Company.”

Count III seeks indemnification and contribution from the Defendants in the event that FXCM is found liable for conduct for which the Defendants are responsible.

Counts IV and V allege that the Leucadia loan, the severance agreements and bonus plans, and the MOU constituted a waste of corporate assets.

Finally, Count VI asserts that Niv, Sakhai, Adhout, and Yusupov were unjustly enriched as a result of the severance agreements and bonus plans.

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