Global Brokerage produces nearly 8,000 documents in “mega lawsuit” brought by investors

Maria Nikolova

No depositions have taken place in the lawsuit targeting Global Brokerage, formerly known as FXCM Inc, and a number of its directors.

fxcm

The parties in the “mega lawsuit” targeting Global Brokerage, Inc. formerly known as FXCM Inc. (“FXCM”), Dror Niv, and William Ahdout, have filed a Letter with the New York Southern District Court updating the Court on the progress of discovery to date.

The document, seen by FinanceFeeds, says that, on February 10, 2020, the plaintiffs in this case (investors in FXCM Inc stock) made an additional production of 40 documents on behalf of Lead Plaintiff 683 Capital Partners, LP, and on February 11, 2020, the plaintiffs produced an additional audio file on behalf of 683 Capital. The plaintiffs have informed the defendants that their document production on behalf of the plaintiffs is now substantially complete.

The defendants have produced nearly 8,000 documents thus far. They are continuing their review of documents that respond to plaintiffs’ search terms and will continue to produce responsive documents on a rolling basis.

As of yet, no depositions have taken place. The deposition of the plaintiffs’ market efficiency expert, Dr. Adam Werner, is scheduled for February 28, 2020. The deposition of Named Plaintiff Sergey Regukh is scheduled for March 10, 2020, and the deposition of Lead Plaintiff 683 Capital is scheduled for March 19, 2020.

As FinanceFeeds reported in January 2020, the plaintiffs in this case filed a motion for class certification with the Court. The proposed Class is defined as:

“All persons and/or entities that purchased or otherwise acquired publicly traded Global Brokerage, Inc., f/k/a FXCM Inc. (“FXCM”) securities, including FXCM 2.25% Convertible Senior Notes due 2018 and Class A common stock, during the period March 15, 2012 through February 6, 2017, both dates inclusive”.

The defendants’ opposition to the plaintiffs’ Class Certification Motion is currently due on March 6, 2020, but this deadline is likely to be extended to April 3, 2020, as indicated in the Letter filed with the Court on February 19, 2020.

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.

Tony Khoury filed the first of four related shareholder actions against FXCM on February 7, 2017. In May 2017, the Court consolidated the related actions, appointed 683 Capital and Shipco as Lead Plaintiffs, and appointed the Rosen Firm as Lead Counsel. The plaintiffs filed their Consolidated Securities Class Action Complaint on June 19, 2017. The defendants moved to dismiss the first amended complaint on August 3, 2017 After briefing, the Court granted the motion to dismiss without prejudice on March 1, 2017. The plaintiffs then filed the second amended complaint on April 6, 2018. The defendants moved to dismiss the second amended complaint on May 7, 2018.

After briefing, the Court issued an Order on March 28, 2019 denying in part the defendants’ motion to dismiss as to Defendants FXCM, Niv, and Ahdout.

The Court concluded back then that the second amended complaint adequately alleges that the remaining defendants have committed securities fraud with respect to statements or omissions concerning FXCM’s supposed agency-trading model, the Company’s purported “order flow” payments with Effex, and Generally Accepted Accounting Principles (“GAAP”). The Court thus denied the motion to dismiss as to FXCM, Niv, and Ahdout.

The Court determined that the second amended complaint plausibly alleges that FXCM misled investors in its public filings with respect to its purported agency-trading model, but only from the beginning of the Class Period until the end of its order flow arrangement with Effex in August 2014.

The Court stated that:

“Regardless of whether FXCM’s arrangement with Effex was standard in the industry and was in compliance with the relevant regulatory requirements, if Plaintiffs are correct, FXCM may have misled their customers by portraying such payments as order flow payments rather than as a profit-sharing arrangement with Effex”.

The lawsuit continues at the New York Southern District Court.

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