How FXCM refused to investigate alleged misconduct of its directors – FinanceFeeds’ research

Maria Nikolova

FXCM’s Special Committee admittedly never adequately investigated the Board’s oversight during the periods covered by the CFTC and NFA investigations.

FXCM’s Board Chairman Bryan Reyhani rejected a request by a company stockholder to investigate the alleged misconduct of current and former directors and officers associated with the broker’s controversial relationship with Effex Capital and the misleading NDD claims of the broker. New information about what was going on at the top of FXCM before the February 2017 settlements with the US authorities and what happened during the months following the shocking revelations about the business and execution model of the company are revealed in documents filed on Monday, April 2, 2018, with the New York Southern District Court.

The documents, seen by FinanceFeeds, were filed by Ryan Spaulding, a beneficial owner of Global Brokerage, Inc. f/k/a FXCM Inc. stock.

On August 31, 2017, Mr Spaulding sent the Board of FXCM a litigation demand concerning the so-called “Effex Scheme”, that is, FXCM’s undisclosed financial relationship with a market maker, Effex Capital, LLC that consistently “won” the largest share of FXCM’s purported No Dealing Desk trading volume. Mr Spaulding demanded that the Board

  • (i) investigate the facts concerning the Effex Scheme and claims arising from them, and
  • (ii) commence litigation against the corporate fiduciaries responsible for damaging FXCM in connection with the Effex Scheme, including certain of the Company’s current and former officers and directors.

What followed was not a very warm reaction.

On September 12, 2017, counsel for FXCM’s Board informed Mr Spaulding that the company was currently litigating two separate shareholder derivative lawsuits, one that related to the Effex Scheme and one that related to the company’s violations of Regulation 5.16. The plaintiffs in both of those cases alleged that a demand on the Board as to the respective allegations in each case would have been futile.

The Board’s response to Mr Spaulding’s Effex Scheme Demand also claimed that the Board believed it was in the Company’s best interest “to wait for the outcome of the demand issues that exist or still exist” in the two pending derivative suits before undertaking an investigation concerning the Effex Scheme Demand.

On November 7, 2017, Mr Spaulding’s counsel received a response letter from Bryan Reyhani, FXCM’s Chairman of the Board, rejecting the Effex Scheme Demand. The details of the rejection shed some light on what happened shortly before FXCM settled with the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA).

Mr Reyhani’s response claimed that in December 2016, “in order to determine whether to settle ongoing investigations by the [CFTC] and the [NFA],” the FXCM Board formed a special committee of purportedly independent directors comprised of James G. Brown, Robin Davis, Arthur Gruen, Eric LeGoff, Ryan Silverman, and Bryan Reyhani.

According to Mr Reyhani’s response, the Special Committee “was granted the exclusive power and authority to consider, negotiate, accept and/or reject draft and final settlement offers regarding the CFTC and NFA investigations and to bind the Company to any final settlement or resolution of these investigations.” The Demand Rejection further noted that “the Board’s oversight during the periods covered by the CFTC and NFA investigations was not the primary focus of the Special Committee’s work.”

Although Mr Reyhani admitted that the investigation did not focus on the Board, the Demand Rejection stated that “nothing from the Special Committee’s unrelated investigation would suggest any bases for Board liability,” including with respect to “breach of duty of loyalty; acts or omissions not in good faith or involving intentional misconduct or a knowing violation of law; or improper personal benefit.”

In conclusion, the Board believed it was not “in the best interest of the Company to fund, at this time, a new Special Litigation Committee of the Board to investigate the allegations set forth in [the Effex Scheme Demand].”

Mr Spaulding has taken the matter to the New York Southern District Court. The case is captioned Spaulding v. Grossman et al (1:18-cv-02461).

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