FXCM Inc faces appeal in “Black Swan” case

Maria Nikolova

The Retirement Board of the Policemen’s Annuity and Benefit Fund of Chicago on Behalf of the Policemen’s Annuity and Benefit Fund of Chicago takes a “Black Swan” case against FXCM Inc to the United States Court of Appeals for the Second Circuit.

Less than a month after the New York Southern District Court ruled in favor of Dror Niv and FXCM Inc, now known as Global Brokerage Inc (OTCMKTS:GLBR), in a case related to the events from January 15, 2015, the legal ruling faces an appeal.

As per a notice filed earlier today with the New York Southern District Court, the Retirement Board of the Policemen’s Annuity and Benefit Fund of Chicago on Behalf of the Policemen’s Annuity and Benefit Fund of Chicago, a plaintiff in the “Black Swan” case, appeals to the United States Court of Appeals for the Second Circuit from the final order and judgment entered on August 13, 2018.

Let’s recall that the plaintiff in the case is an institutional investor that purchased FXCM common stock from March 17, 2014, up to and including January 20, 2015. It brought this putative class action on behalf of all those who purchased or otherwise acquired FXCM stock during the Class Period and were damaged thereby.

The plaintiff had alleged, specifically, that FXCM and Niv misled investors about the risks associated with FXCM’s business, especially with respect to the risks associated with FXCM’s “agency model,” FXCM’s leverage policies, and FXCM’s exposure to massive losses if the Euro were de-pegged from the Swiss Franc.

The Court, however, found that the broker and its ex-CEO did not mislead investors. FXCM’s statements in its 2013 10-K that it was a “riskless principal” and was “not exposed to market risk” were not materially misleading when viewed in the context of the document as a whole. In that context, it is clear that FXCM’s agency model did not eliminate all risk, but only certain types of risk. The document discloses, for instance, that FXCM’s operations “involved risk of loss due to the potential failure of customers to perform their obligations under these transactions,” including the risk that “a customer’s losses exceed the amount of cash in their account.”

For these reasons, according to the Court, no reasonable investor reading FXCM’s 2013 Form 10-K would have believed that FXCM’s agency model made it “riskless.”

Plaintiff also claimed that as FXCM’s CEO, Niv must have known that FXCM was concealing an “enormous, highly-leveraged $2.2 billion long bet,” and thus must have known that FXCM’s statements about its risks were false. On its own, this allegation is not enough to show scienter, the Judge said. Although Niv’s knowledge of the $2.2 billion position shows that Niv was aware of the possible consequences of the EUR/CHF being de-pegged, it does not speak to the likelihood of that event occurring. To prove scienter, Plaintiff must allege Niv perceived the risk as a serious possibility at the time, not merely in hindsight. But the plaintiff admits that “industry participants” were “shocked” by the SNB “suddenly lifting the cap.”

Plaintiff also contended that scienter exists because Niv was aware “that other companies had raised margin requirements” with respect to the EUR/CHF pair. As the Court previously held, however, information about FXCM’s competitors “provides no information about Defendants’ conduct or knowledge.”

The fact that Niv made a different decision than his competitors shows nothing more than that he had a different business judgment, the Court ruled.

Further documents in the appeal proceedings are due within 14 days to the Court of Appeals, Second Circuit.

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