Nature of “order flow” payments now at center of mega lawsuit against FXCM

As the “Mega lawsuit” brought by former investors in the public securities of FXCM Inc, now known as Global Brokerage Inc (NASDAQ:GLBR), continues to develop at the New York Southern District Court, the nature of the so-called “order flow” payments that Effex Capital made to FXCM is now at the focus of the dispute.

The Lead plaintiffs, 683 Capital Partners, LP and Shipco Transport Inc., on Monday filed their response to a motion by FXCM and other defendants to dismiss the case. FinanceFeeds’ readers may recall the rather colorful defense presented by FXCM’s counsel in August. Now, the plaintiffs replied to those arguments.

For starters, let’s summarize the main points of this case, which we call “mega” due to the number of plaintiffs and defendants involved. The action, captioned “In re Global Brokerage, Inc. f/k/a FXCM Inc. Securities Litigation” (1:17-cv-00916), is a class action on behalf of investors in the public securities of FXCM Inc. The action is brought on behalf of a putative class consisting of all persons and entities who purchased or otherwise acquired publicly traded FXCM securities from March 15, 2012 to February 6, 2017.

The plaintiffs accuse the broker and a number of its senior executives and employees of violations under the Securities Exchange Act of 1934.

The Complaint alleges that FXCM misled its clients, investors and the regulators by claiming that the company’s “No Dealing Desk” (“NDD”) platform would provide its customers with a Forex trading platform that was free of conflicts of interest. As a result of the investigations by the CFTC and NFA, the allegations and penalties, the price of FXCM’s stock dropped sharply, losing more than half of its value and damaging investors.

• The “Order Flow” payments

In the document filed with the Court on September 18, 2017, the Plaintiffs call the “order flow” payments made by Effex Capital to FXCM “a complete sham”. From 2010 to 2014, the plaintiffs say, no market maker besides Effex paid FXCM for order flow. These payments are dubbed to have been merely kickbacks of FXCM’s cut of profits generated by Effex from trading against FXCM’s retail customers. That is, the supposed “order flow” payments were merely disguised profit-sharing payments per FXCM’s arrangement with Effex.

• The opinion

FXCM has tried to defend itself by arguing that statements such as “we believe that [the agency model] aligns our interests with those of our customers” state an opinion. The plaintiffs note that this argument is meritless, as these statements “can be actionable under the securities laws if the speaker knows the statement to be false.”

• Where is the Services Agreement?

One of the most interesting remarks made by the plaintiffs is that of the Services Agreement between FXCM and Effex Capital.

FXCM and other defendants claim that the Services Agreement between FXCM and Effex was unconnected to the profits or losses of FXCM customers, the order flow payments were based solely on trading volume, and FXCM did not take positions opposite its NDD customers via Effex.

However, Defendants make this and other claims concerning the “Services Agreement,” but have at no point filed this agreement publicly, nor have they attached this purported agreement to their motion papers.

The plaintiffs argue that this document should be filed with the Court.

• GAAP

GAAP requires reporting entities to consolidate and make disclosures about Variable Interest Entities (“VIEs”). Plaintiffs allege that Effex was a VIE, and FXCM was the primary beneficiary with regard to Effex, because FXCM was entitled to and did receive 70% of Effex’s profits. FXCM, however, did not include information about Effex as a VIE in its SEC reports.

The Complaint also alleges that in addition to Defendants Niv and Lande, Defendants Sakhai, Ahdout, Grossman, Yusupov, Brown, Silverman, Gruen, Davis, Legoff, Santoro (in 2012, 2013, 2014), Reyhani (2015), and Deverell (2015) each signed various FXCM 10-K’s filed with the SEC during the Class Period and are thus responsible for the misleading and omissive statements made in the filings they signed.

• Findings will be findings

Defendants reserved their right to object to the findings presented in the CFTC Order in other proceedings, such as this one, and neither admitted nor denied the findings therein. However, the statements in the CFTC Order still constitute the official findings of the CFTC.

This remark echoes the words of the Judge assigned to a case brought by Effex Capital against the National Futures Association. Commenting on Effex’s request that NFA takes down its Complaint and other press materials related to FXCM from February 6, 2017, the Judge said that “even if the notice is taken down, the findings by the NFA would still be the findings”.