Investors aim to prove securities fraud by FXCM, Niv, Lande, Ahdout
Niv and Lande did not disclose all fraud, including their scheme to conceal FXCM’s improper relationship with Effex, former investors argue.
The “mega lawsuit” brought by ex-investors in securities of FXCM Inc, now known as Global Brokerage Inc (OTCMKTS:GLBR), continues at the New York Southern District Court.
On Wednesday, June 6, 2018, the lead plaintiffs in the case – 683 Capital Partners, LP and Shipco Transport Inc., as well as named plaintiffs Sergey Regukh and Brian Armstrong, submitted a memorandum of law trying to prove that the broker and a number of its top-ranking executives committed securities fraud.
The plaintiffs insisted that there is a clear case of securities fraud against FXCM Inc. and the Individual Defendants. (The company was known as FXCM Inc. at all relevant times. Together with its subsidiaries, the company is referred by the plaintiffs as “FXCM” or the “Company.” The “Individual Defendants” are Dror Niv, William Ahdout, and Robert Lande.)
Let’s recall that the complaint refers to the events from February 2017. The CFTC and NFA reached settlements with FXCM and certain of its executives which, among other things, banned FXCM from operating in the United States. In light of the allegations and penalties, the price of FXCM’s stock dropped sharply, losing more than half of its value and damaging investors.
The relationship between FXCM and Effex Capital was at the heart of the action. The plaintiffs note that the defendants’ claim that the sham “order flow” payments between FXCM and Effex were purely contractual, routine payments, is unfounded. According to the investors, FXCM offers no explanation for the allegations that: (1) no other market maker ever made any such payments; (2) no other market maker was afforded the advantages FXCM granted to Effex; (3) the payments were constructed to approximate a percentage of Effex’s trading profits based off of FXCM’s prior internal employment agreement with Dittami; and (4) the payments were billed as profits and losses.
The plaintiffs also allege that the defendants violated GAAP by failing to consolidate Effex into FXCM’s financial statements and failing to disclose its dealings with Effex as related party transactions. These claims, coupled with the plaintiffs’ scienter allegations, are sufficient to state a claim for securities fraud, according to the investors.
FXCM was subject to regulatory inquiries and investigations by at least October 2013, yet consistently failed to disclose that regulators were actively scrutinizing the company’s relationship with Effex. Instead, FXCM repeatedly stated that “our business is also subject to extensive regulation, which may result in administrative claims, investigations and regulatory proceedings against us.” These statement were false and misleading because the defendants created the false and misleading impression that the broker was not currently under regulatory investigations that portended, and ultimately resulted in, a material impact on FXCM’s business.
According to the plaintiffs, FXCM and its executives knew of the NFA investigation by at least October 2013, when NFA compliance staff pointedly asked FXCM executives about the company’s relationship with Effex. Terminating the pretextual “services agreement” with Effex in August 2014 evinces Defendants’ awareness that the regulatory investigations into FXCM’s relationship with Effex were ramping up and presented a material risk to the Company. At the latest, by September 2015 the CFTC had explicitly notified FXCM that it was conducting an investigation into potential legal and regulatory violations concerning the Company’s relationship with Effex. Even when FXCM finally disclosed the ongoing regulatory investigations, it soft-played them as benign examinations, rather than acknowledging the high likelihood of imminent legal action demonstrated by the tolling agreement.
Regarding the responsibility of the individual defendants, the plaintiffs argue that, in connection with various Class Period filings, Niv and Lande signed Sarbanes-Oxley Act of 2002 (“SOX”) certifications attesting to the accuracy of the respective filings, certifying that “this report does not contain any untrue or misleading statement of a material fact,” and certifying that Niv and Lande each disclosed “any fraud, whether or not material.”
The SOX certifications were false and misleading because (1) the accompany financial statements were not accurate due to the GAAP violations; (2) each of the reports contained other false and misleading statements of material fact, as outlined above; and (3) Niv and Lande did not disclose all fraud, including Defendants’ scheme to conceal the Company’s improper relationship with Effex. The SOX certifications are actionable because Niv and Lande had knowledge that the certifications were false.
According to the plaintiffs, Niv lied to NFA compliance staff when questioned about FXCM’s relationship with Effex. For example, Niv failed to disclose any of the details concerning FXCM’s relationship with Effex and Dittami. Niv also misrepresented that he had a prior working relationship with Dittami arising from when Dittami was employed by other liquidity providers.
The defendants, including Niv, are also said to have known that the company was under investigation by the CFTC and NFA as early as October 2013 yet failed to fully disclose these highly material investigations during the Class Period. Niv’s failure to disclose the true nature of FXCM’s relationship with Effex and Dittami and his approval of FXCM’s false responses to the NFA’s investigation demonstrated his aim to conceal FXCM’s undisclosed interest in Effex, muddy the NFA’s attempts to clarify the FXCM-Effex relationship, and downplay Dittami’s role with FXCM and Effex. Consequently, these allegations also support an inference of scienter.
According to the plaintiffs, FXCM structured its payments from Effex to avoid the NFA’s scrutiny. As CFO, Lande knew that FXCM directed Effex to remit these payments to FXCM Holdings rather than FXCM’s U.S. subsidiary, because FXCM Holdings was not a member of the NFA. These unusual payments, totaling approximately $77 million, should have been a red flag for Lande as CFO.
These allegations, when considered holistically, give rise to a strong inference of scienter, the plaintiffs say. Indeed, the CFTC Order concluded that “FXCM acted with scienter” because “FXCM personnel had full knowledge of the representations that the firm was making to its customers about the No Dealing Desk model, as well as the facts about” Effex’s relationship with FXCM.
The case is captioned In re Global Brokerage, Inc. f/k/a FXCM Inc. Securities Litigation (1:17-cv-00916).
