FXCM’s “flash crash” narrative is merely a smokescreen, according to plaintiffs in securities fraud case

The proceedings in a securities fraud class action against Global Brokerage Inc (NASDAQ:GLBR), formerly known as FXCM Inc, and Drew Niv continue at the New York Southern District Court, with the plaintiffs in the case, captioned International Union of Operating Engineers Local No. 478 Pension Fund v. FXCM Inc. et al (1:15-cv-03599), filing their opposition to the defendants’ motion to dismiss on Tuesday.

The document, seen by FinanceFeeds, provides a detailed response to the rather colorful defense that FXCM’s legal representative has offered. One of the main points of this defense was that Drew Niv need not be clairvoyant, meaning that he could not have predicted the SNB decision from January 15, 2015 and its outcome. In their response to this argument, the plaintiffs note that they do not allege that Defendants should have been clairvoyant, but rather that they violated their legal duty under the federal securities laws to truthfully disclose the risks inherent in the Company’s so-called “agency” trading model.

The plaintiffs reiterate their earlier allegations that Defendants’ narrative about FXCM being the innocent victim of a “Black Swan” event is just a fiction designed to cover-up fraudulent misconduct.

Specifically, Defendants are alleged to have wrongly attributed FXCM’s losses to a once-in-a-lifetime “Black Swan event,” falsely stating that the failure of its banks to provide pricing and a lack of liquidity had caused its customers’ positions to be liquidated at dislocated prices. In fact, as testimony of FXCM witnesses and documents produced by FXCM in the CFTC proceeding have since revealed, the “flash crash” narrative was a smokescreen. As Defendant Niv himself admitted in a February 11, 2015 email, FXCM’s banks on the other side of its EUR/CHF trades – Citibank and Deutsche Bank – had “never turned FXCM off.”. This was confirmed by Janelle Lester, FXCM’s head of compliance.

The case is not about whether the SNB actions were a “surprise,” but rather about whether Defendants knowingly misstated and concealed the fundamentals of FXCM’s business and the massive risks facing the broker, the plaintiffs argue.

Rather than a “low-probability” event, the risk of loss to FXCM was both known to and discussed by the defendants, as shown by the testimony of operations manager Paresh Patel who raised the issue of increasing margins with Niv as its competitors’ customers flocked to FXCM to take advantage of its more generous (and risky) margin requirements, but Niv declined to do so. A confidential witness also said that he had issued a similar warning to Niv subordinate Brendan Callan, head of the Company’s European operations.

The plaintiffs also stress the importance of the events from February 2017, when the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA) published proceedings against FXCM and Niv. Rather than contest the allegations made in these proceedings, Defendants opted to settle them, the plaintiffs stress. FXCM and Niv have noted that “the CFTC Consent Order is a ‘no-admit no-deny’ settlement with no evidentiary value,” and that the Court should draw inferences in their favor from the fact that the CFTC did not make certain allegations.

The plaintiffs note that they rely on testimony and documents produced by Defendants to the CFTC, not the findings in the Consent Order.

That the CFTC did not allege, for example, “that FXCM’s public filings were false or misleading, or that Defendants had misled . . . investors regarding the risks associated with the agency model” is not surprising given that the CFTC’s regulatory focus is the protection of customer assets, not the protection of investors.

As FinanceFeeds has reported, the case at hand is a securities fraud class action brought on behalf of all purchasers of FXCM common stock between March 17, 2014 and January 20, 2015. During the Class Period, Plaintiff and the Class purchased FXCM securities at allegedly artificially inflated prices. When FXCM’s and Niv’s alleged misrepresentations were revealed and the information once concealed from the market was unravelled, the price of FXCM’s securities significantly declined, causing investors’ losses. The Defendants’ conduct is said to have caused an economic loss to the Plaintiff and the Class.