Global Brokerage (former FXCM Inc) calls securities litigation allegations “boilerplate mantra”

Maria Nikolova

FXCM says its agreement with Effex did not harm FXCM retail customers or cause them to lose money on their trades. The company also argues the agreement “provided significant financial benefits to FXCM customers”.

fxcm

There have been some developments following FinanceFeeds’ earlier report about the “mega defense” that Global Brokerage Inc (NASDAQ:GLBR), formerly known as FXCM Inc, is building against allegations made in a complaint by a class of plaintiffs who bought securities in the company and allege harm as a result of the drop in the share price of the company following the February 2017 settlements between FXCM and US regulators.

The case, captioned as “In re Global Brokerage, Inc. f/k/a FXCM Inc. Securities Litigation”, which we have labeled as the “mega lawsuit” due to the grand number of parties involved and the drastic claims made, has finally seen a response from FXCM.

The law firm, representing the “FXCM defendants”, a group including Global Brokerage (FXCM Inc), Dror Niv, William Ahdout, David Sakhai, Eduard Yusupov, Janelle G. Lester, Robert Lande, Ornit Niv, Nicola Santoro, Jr., Margaret Deverell, David S. Sassoon, Kenneth Grossman, James Brown, Ryan Silverman, Arthur Gruen, Robin E. Davis, Eric LeGoff, and Bryan Reyhani, has filed a Motion to dismiss the class action. The move has been accompanied by a Memorandum of Law in support of the Motion to dismiss. The document seeks to refute allegations by plaintiffs, including lead plaintiffs 683 Capital Partners, LP and Shipco Transport Inc., and named plaintiffs Sergey Regukh and Brian Armstrong.

  • The “pay-for-flow” agreement

In the Memorandum, FXCM admits it had an agreement with Effex. The nature of the agreement, according to the broker, is “pay-for-flow”, which was not tied in any way to the profit or loss of FXCM’s retail customers or Effex. FXCM says it was simply a flat-fee based solely on customer trading volume. The broker also claims it did not take any market position by virtue of having such a pay-for-flow agreement with Effex. Moreover, FXCM says “the pay-for-flow agreement did not harm FXCM retail customers or cause them to lose money on their trades; to the contrary, the agreement provided significant financial benefits to FXCM customers, including greater depth of liquidity and lower trade rejection rates”.

  • The disclosure of the relationship with Effex

FXCM says that it has no ownership interest in Effex.

The broker notes that before January 4, 2016, it had no regulatory obligation to disclose the identities of the liquidity providers that it used, let alone those with whom it had a pay-for-flow agreement. And when FXCM’s obligation to disclose the identity of liquidity providers changed in 2016, it made such disclosures, which were sufficient disclosures and true statements.

Regarding the claims made by the Plaintiffs that FXCM should have disclosed to shareholders that the NFA was asking questions concerning FXCM’s relationship with Effex, FXCM stresses it had no obligation to disclose such information. “The law is well-settled that a company does not have to disclose the existence of a government investigation”, the Memorandum says.

  • FXCM’s NDD opinion

The broker refers to statements made on its website, including one that says “Our agency model is fundamental to our core business philosophy because we believe that it aligns our interests with those of our customers and reduces our risks.”

This statement has been dubbed as “misleading” by the plaintiffs.

According to FXCM, the plaintiffs are inappropriately seeking to impose Section 10(b) liability on a statement of opinion, not fact. FXCM’s statement that “we believe” the NDD model “aligns our interests with those of our customer,” is merely the company expressing its opinion.

  • The securities

FXCM notes that lead plaintiffs 683 Capital Partners, LP and Shipco Transport Inc., and named plaintiffs Sergey Regukh and Brian Armstrong purportedly purchased FXCM securities during the Class Period. However, each of the plaintiffs began purchasing their FXCM securities after FXCM publicly announced that it terminated its pay-for-flow agreement with Effex.

  • The regulatory settlement

The CFTC and NFA alleged that FXCM failed to disclose that, between 2009 and 2014, it had an agreement with Effex under which the broker received payment in exchange for customer trading volume and, according to these regulators, such agreement created a conflict of interest between the company and its retail trading customers. FXCM notes that “in entering into this settlement, FXCM did not admit the CFTC and NFA allegations, and expressly preserved the right to contest such allegations, should they be asserted or relied upon in another matter by other litigants, as Plaintiffs seek to do here.”

At the time of the settlement, FXCM says, there was no adjudication of the alleged regulatory violations by the broker, Niv, and Ahdout. And to date, such allegations have not been found to be true or adjudicated by any court of law.

  • The boilerplate mantra

FXCM says that plaintiffs’ key allegations have been “lifted directly from the CFTC Order and the NFA Complaint”. Plaintiffs are alleged to have simply copied the allegations and then to have mischaracterized or exaggerated several of them to suit their needs.

Concerning the plaintiffs’ claims that the allegations are “based upon personal knowledge” and “investigation conducted by and through Plaintiffs’ attorneys,” FXCM replies that “these phrases are not talismans that will allow a complaint to pass muster, especially when the Complaint displays neither personal knowledge nor independent investigation”.

Concerning FXCM’s filings with the Securities and Exchange Commission (SEC), the Memorandum states that the plaintiffs do not refer to specific portions of the filings when they label them materially false and misleading, or why that is the case.

“Instead, Plaintiffs repeat the same boilerplate mantra after discussing each SEC filing”, FXCM says.

The company also notes the fact that FXCM’s outside auditors, Ernst & Young LLP opined that the FXCM’s financial statements were not materially misstated during the Class Period.

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