Global Brokerage, Drew Niv, William Ahdout argue against proposed class in “mega lawsuit”

Maria Nikolova

The lawsuit was brought by investors who purchased securities in Global Brokerage, formerly known as FXCM Inc, during the period from March 15, 2012 through February 6, 2017.


The “mega lawsuit” brought by investors of Global Brokerage, Inc. formerly known as FXCM Inc, continues at the New York Southern District Court. Several months after the plaintiffs submitted their motion for class certification, the defendants have filed their reply. On June 12, 2020, FXCM, Dror Niv and William Ahdout, submitted a set of documents in opposition to the plaintiffs’ motion.

Let’s recall that the class certification motion requests a certification under Federal Rule of Civil Procedure 23 f a class consisting of (i) purchasers of FXCM’s Class A common stock during the period March 15, 2012 through February 6, 2017, both dates inclusive (the “Stock Class”), and (ii) purchasers of FXCM’s 2.25% Convertible Senior Notes due 2018 (the “Notes”) during the same time period (the “Notes Class”). Plaintiffs propose Shipco Transport Inc. and E-Global Trade and Finance Group, Inc., purchasers of the common stock, and 683 Capital Partners, LP, a Notes purchaser, as class representatives.

The plaintiffs allege that, for years, FXCM claimed that its “No Dealing Desk” (“NDD”) platform provided its customers with retail Forex trading that was free of conflicts of interest. Unlike other forex trading platforms, FXCM claimed that it had no financial interest in NDD trades. Instead of trading against its customers, FXCM purported to act merely as an agent, collecting small markups and routing customers’ trades to independent “market makers” that provided liquidity to the platform. These assurances, according to the plaintiffs, were false.

In 2009, FXCM began to develop a high frequency trading algorithm to trade against unsuspecting customers on its NDD platform. As FXCM prepared to go public in 2010, the company’s compliance department voiced serious concerns over trading against FXCM’s customers while explicitly promoting the NDD platform as “conflict-free.” To avoid scrutiny, FXCM spun off the trading operations as a purportedly “independent” company, Effex Capital, LLC.

In truth, the plaintiffs say, FXCM created Effex as a functional subsidiary. FXCM installed John Dittami, who had overseen development of the trading algorithm, to head Effex. FXCM entered into a sham “services agreement” by which it would retain 70% of Effex’s trading profits, disguised as “order flow” payments. FXCM also provided Effex with millions in start-up capital, allowed Effex to operate out of FXCM’s offices rent-free, and designated two FXCM employees to work for Effex. Through 2014, Effex had sent nearly $80 million of its trading revenue to FXCM, the plaintiffs’ complaint alleges. At the same time, FXCM had no similar arrangements with, and received no payments from, any other market maker.

Eventually, the United States Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) brought regulatory actions against FXCM based on the brokerage’s undisclosed relationship with Effex. On February 6, 2017, the CFTC announced that it had banned the company from operating in the US after finding that FXCM was taking undisclosed positions opposite its retail customers. The CFTC issued an Order which required FXCM, Niv and Ahdout to pay a $7 million civil penalty, cease and desist from further violations of the Commodity Exchange Act and CFTC Regulations, and permanently withdraw from CFTC registration. The same day, NFA also issued an order against FXCM, Niv, Ahdout, and Niv’s sister, Ornit Niv.

In response to the CFTC and NFA orders, the price of FXCM’s stock and the FXCM Notes dropped sharply, damaging investors.

According to the defendants’ response, seen by FinanceFeeds, the plaintiffs have to prove that the proposed class complies with the requirements of Rule 23. That is, the plaintiffs must show that they have satisfied all four requirements of Rule 23(a)—numerosity, commonality, typicality, and adequacy of representation—and at least one of the requirements of Rule 23(b), in this case, Rule 23(b)(3)’s requirement that common questions of law and fact predominate for the proposed class and that a class action is superior to other available litigation avenues. A district court must conduct a rigorous analysis of Rule 23’s requirements before certifying a class.

According to FXCM, Drew Niv and William Ahdout, the plaintiffs did not demonstrate that they have satisfied all the requisite elements of Rule 23, especially with respect to the putative Notes Class. First, according to the defendants, the plaintiffs fail to demonstrate that the proposed Stock or Notes Class meets all four elements of Rule 23(a). With respect to the Notes Class, the number of noteholders is not sufficiently numerous. The Notes were issued under Rule 144A and, therefore, were purchased by large institutional investors. Additionally, Notes purchasers in the initial offering and before the Notes began trading on June 24, 2014 cannot be included in the putative Notes Class. More significantly, the holders of the vast majority of the Notes have waived and released any securities claims they might have against Defendants under a forbearance agreement they entered into with the company in 2019.

Furthermore, the defendants argue, with respect to both the proposed Stock and Notes Class, the proposed class representatives are all atypical as they are subject to unique defenses. To this end, all of the plaintiffs began purchasing FXCM securities after their value fell precipitously because of a liquidity crisis caused by the Swiss National Bank’s decision in January 2015 (two years before the end of the proposed class period) to remove the euro/swiss franc peg and six months after FXCM announced that it was no longer engaged in pay-for-flow arrangements with liquidity providers.

In addition, the defendants argue that all of the plaintiffs are not adequate class representatives, “having abdicated their duty to participate meaningfully in discovery”.

Second, Plaintiffs have failed to satisfy Rule 23(b)(3)’s predominance and superiority requirements at least with respect to the putative Notes Class.

Finally, according to the defendants, the plaintiffs do not offer a damages methodology that ties to their theory of liability. The alleged corrective disclosure included other information that substantially altered FXCM’s financial prospects. Yet, the defendants say, the plaintiffs fail to show that they could isolate the impact of these collateral consequences from losses arising from the alleged fraud. The defendants argue that the plaintiffs further fail to show that they could calculate the price drop had the alleged “truth” been revealed by FXCM earlier (i.e., any price inflation attributable to the alleged misstatements).

That is why, according to the defendants, the plaintiffs’ motion for class certification should be denied.

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