NFA fights Effex Capital’s appeal in lawsuit about FXCM disciplinary decision

Maria Nikolova

NFA insists that Effex Capital did not exhaust all administrative means to challenge its disciplinary decision against FXCM from February 2017.

The National Futures Association (NFA) has responded to the appeal of Effex Capital and John Dittami, whose names were embroiled in the regulatory action that led to the exit of FXCM from the US market.

On Wednesday, September 26th, NFA filed Appellee’s brief with the Seventh Circuit U.S. Court of Appeals. The Association is seeking to affirm an earlier Court ruling that dismissed Effex’s complaint against NFA.

Let’s recall what this story is about. Effex Capital, LLC and its CEO John Dittami object to findings NFA made against an NFA member, Forex Capital Markets, LLC (FXCM), in a disciplinary proceeding. But instead of seeking review via the CFTC, Effex sued in district court, seeking $10 million in damages and an injunction. The issue presented is:

Did the district court properly hold that the exclusive avenue for challenging NFA’s disciplinary decisions is review by the CFTC, and that because Effex has not pursued this path, it failed to “exhaust its administrative remedies”?

Effex seeks to avoid that scheme. It objects to findings made against someone else, NFA member FXCM, in an NFA disciplinary proceeding, claiming they are false and should not have been disclosed publicly. But instead of seeking review by the CFTC, Effex sued in district court, claiming that NFA’s statements about FXCM that mention Effex constituted state-law torts and that its procedures violated due process.

NFA argues that the district court correctly dismissed Effex’s action.

This suit arises out of NFA’s adjudication of a complaint against FXCM. NFA’s Compliance Department conducted a multi-year investigation and concluded that FXCM violated NFA rules. Following an investigative report detailing the violations, NFA’s Business Conduct Committee (the BCC) authorized a complaint against FXCM.

The broker could have denied the allegations and proceeded to a hearing before the BCC. FXCM chose not to contest NFA’s Complaint; instead, it settled the matter and accepted the most severe NFA disciplinary sanction: a permanent bar from NFA membership for FXCM and several of its principals.

Hence, on February 6, 2017, NFA (1) issued publicly its Complaint; (2) accepted the “offer of settlement” from FXCM and the principals; and (3) issued a decision. Case information appeared in NFA’s Background Affiliation Status Information Center, or “BASIC,” including a narrative summary of proceedings. NFA also issued a press release citing to its Complaint and Decision.

NFA’s Decision found one set of violations that stemmed from FXCM’s dealings with Effex: FXCM advertised that it used a “No Dealing Desk” model – using an independent liquidity provider to execute trades – that eliminated a potential conflict of interest between FXCM and customers. NFA’s Decision found that FXCM directed trades to Effex, which “was purportedly independent” but which FXCM actually supported and controlled through various means. It also found that FXCM allowed Effex to engage in execution tactics that were abusive to FXCM’s customers – Hold Timer and Previous Quote.

Also on February 6, 2017, the CFTC issued its own decision concerning FXCM. The CFTC made materially identical findings to NFA’s. The CFTC called Effex “HFT Co” but quoted a 2012 post from Forex Factory, which identifies Effex by name.

Effex waited four months, then sued NFA and certain individuals in district court. Effex’s complaint alleged that the documents referring to NFA’s disciplinary adjudication – the Complaint, Decision, Release, and Narrative – cast Effex’s relationship with FXCM in a negative light, harmed Effex’s reputation, and disclosed Effex’s trade secrets. In particular, Effex claimed that the references to it gave rise to a federal due-process violation and four state-law causes of action: defamation, interference with business relations and economic advantage, and trade secret misappropriation.

Effex sought an injunction requiring NFA to, among other things, “delete all references to Effex” in the decision documents, and to issue new documents in accord with what Effex claims about the facts, including that “Effex was not a de facto dealing desk of FXCM,” and that “Effex was not controlled by FXCM.”. Effex also sought damages in excess of $10 million.

NFA moved to dismiss, with prejudice, on several grounds: that NFA was absolutely immune from claims arising out of disciplinary proceedings, that Effex had failed to exhaust its administrative remedies before the CFTC, and that Effex had no non-preempted cause of action—specifically, that all Effex’s state-law claims were preempted, and that Effex lacked a private cause of action for its federal due-process claim.

The district court granted NFA’s motion based on Effex’s failure to exhaust.

In its latest Court filings, NFA argues that three related doctrines prevent attempts, like the one launched by Effex, to circumvent Congress’s comprehensive administrative review scheme by suing NFA in district court.

  • First, there is the exhaustion doctrine which provides that the path for administrative review that Congress has established must be followed—and if would-be litigants seek to avoid that path by suing in district court, the suits must be dismissed.
  • Second, absolute immunity ensures that when SROs like NFA exercise adjudicatory and regulatory functions, they receive the same protection from suit that government actors receive when performing similar functions. Just as someone disappointed with a district court’s decision can appeal, but not sue the judge, someone aggrieved by an SRO’s decision must seek review by the federal regulator.
  • Third, Congress has preempted state-law causes of action that would circumvent the administrative process, and Congress has declined to enact a federal cause of action for any of the claims Effex presses.

The Association also notes that Effex’s arguments about challenging the dissemination of information rather than NFA’s findings about FXCM are simply forms of artful dodging. According to NFA. Effex’s allegations necessarily imply that NFA committed errors in the underlying proceeding. By alleging that NFA’s statements are “false,” Effex is disputing the veracity of NFA’s findings in the underlying proceeding. And by alleging that NFA improperly disseminated its statements without “adopting notice and hearing provisions or procedures to intervene,”, Effex is challenging NFA’s procedures in that proceeding. If NFA’s adjudication had used different procedures and made different findings, Effex’s claims would vanish.

NFA stresses that all Effex’s claims arose because, and only because, NFA issued a disciplinary decision. NFA’s publication of information about its decision in BASIC at the time of the decision is no different than a court’s syllabus, or summary information in PACER. It does not change that the gravamen of Effex’s complaint is about NFA’s disciplinary decision.

The district court’s judgment should be affirmed, NFA concludes.

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