FXCM, Drew Niv, William Ahdout fail to escape “mega lawsuit”

There has been some development in the so-called “mega lawsuit” targeting Global Brokerage, Inc. f/k/a FXCM Inc. (“FXCM” or the “Company”), Dror Niv, William Ahdout, and Robert Lande.

Earlier this week, Judge Ronnie Abrams of the New York Southern District Court signed Opinion & Order nixing the attempt of several of the defendants – FXCM, Niv, and Ahdout, to dismiss the lawsuit against them.

The lead plaintiffs in this case – 683 Capital Partners, LP and Shipco Transport Inc., and named plaintiffs Sergey Regukh and Brian Armstrong, have brought this action, alleging that, from March 15, 2012 until February 6,2017, the defendants committed securities fraud in violation of Sections IO(b) and 20(a) of the Securities Exchange Act of 1934 and Rule l0(b)-5. Specifically, the plaintiffs allege that the defendants were responsible for false or misleading statements with respect to the company’s purported agency-trading model and FXCM’s relationship with another company, Effex.

On April 6, 2018, Plaintiffs filed a second amended complaint (SAC) in this action, which the defendants now move to dismiss. On March 28, 2019, the motion was granted in part and denied in part. The Court dismisses the plaintiffs’ claims against Lande. The Court concludes, however, that the second amended complaint adequately alleges that the remaining defendants have committed securities fraud with respect to statements or omissions concerning FXCM’s supposed agency-trading model, the Company’s purported “order flow” payments with Effex, and Generally Accepted Accounting Principles (“GAAP”). The Court thus denied the motion to dismiss as to Defendants FXCM, Niv, and Ahdout.

The Court determined that the second amended complaint plausibly alleges that FXCM misled investors in its public filings with respect to its purported agency-trading model, but only from the beginning of the Class Period until the end of its order flow arrangement with Effex in August 2014.

The plaintiffs also contended that the defendants were responsible for false and misleading statements with respect to the order flow arrangements themselves. Specifically, the plaintiffs alleged that, although FXCM represented these payments in their public filings as standard payments for order flow between FXCM and Effex based on customer transactions executed by Effex, they were, in reality, “an approximation of 70% of Effex’s profits and losses from its trades on the FXCM platform.” According to Plaintiffs, by portraying these payments as for order flow rather than as profit-sharing agreements, Defendants effectively hid the extent of the Company’s relationship with Effex from its customers and investors. The Court concludes that, at this stage of the proceedings, the plaintiffs have sufficiently alleged that FXCM’ s public misstatements about these payments were at the very least misleading.

Regardless of whether FXCM’s arrangement with Effex was standard in the industry and was in compliance with the relevant regulatory requirements, if Plaintiffs are correct, FXCM may have misled their customers by portraying such payments as order flow payments rather than as a profit-sharing arrangement with Effex, the Court ruled.

Plaintiffs next allege that FXCM’s financial statements violated GAAP in at least one of two ways. First, Plaintiffs assert that these statements violated GAAP by failing to disclose that Effex was a Variable Interest Entity (“VIE”), which would have required it to consolidate this entity. Alternatively, the plaintiffs contend that, even if FXCM was not required to report Effex as a VIE, it was required under GAAP to disclose its transactions with Effex as a “related party.” The Court concludes that Plaintiffs have adequately alleged the Company made false representations or omissions with respect to GAAP during the time of the Company’s order flow arrangement with FXCM.

Further, the Court finds that the plaintiffs plausibly allege that Niv and Ahdout “knew facts or had access to information suggesting” that FXCM’s portrayal of its agency-trading model and financial arrangements with Effex were “not accurate.” The plaintiffs, however, have not alleged sufficient facts to attribute scienter to Lande. But they have adequately alleged scienter with respect to FXCM.

Finally, the Judge addressed the loss claims made by the plaintiffs. The second amended complaint alleges that shares of FXCM’s stock fell over 49% and FXCM’s Notes fell 37% the day after the announcement of the settlement with the US regulators. The Court concludes that the plaintiffs have adequately alleged that FXCM’s drop in stock price was caused by the regulatory investigations’ disclosure of the defendants’ purported fraud, and that the plaintiffs have properly pleaded loss causation.

A conference in this case is scheduled for May 9, 2019. No later than one week before this conference, the parties have to jointly submit a proposed case management plan and scheduling order.