NY Court finally schedules oral argument in “mega lawsuit” against FXCM Inc

There is finally some development in the so-called “mega lawsuit” against William Ahdout, Dror Niv, Global Brokerage Inc (OTCMKTS:GLBR) f/k/a FXCM Inc., and Robert Lande. The case, which consolidates several actions brought on behalf of FXCM investors, represents a federal securities class action. It was launched on behalf of a class consisting of all persons and entities who purchased or otherwise acquired publicly traded FXCM securities, including FXCM 2.25% Convertible Senior Notes due 2018 and Class A common stock from March 15, 2012 to February 6, 2017.

The plaintiffs seek to recover compensable damages caused by alleged violations of federal securities laws by FXCM and its top executives.

In March last year, the plaintiffs suffered a defeat, as the Court granted FXCM’s motion to dismiss. The fight did not stop there, however. The plaintiffs have filed a second amended complaint, followed by a stark response by the defendants.

Earlier today, Judge Ronnie Abrams of the New York Southern District Court signed an Order stating that an oral argument shall be held in this case on Wednesday, February 27, 2019, at 4:00 p.m. in Courtroom 1506 of the U.S. District Court for the Southern District of New York, 40 Foley Square, New York, New York. The oral argument will be dedicated to the second amended complaint filed by the plaintiffs and the motion to dismiss filed by the defendants.

• The investors’ stance:

The lead plaintiffs in this “mega lawsuit” are 683 Capital Partners, LP and Shipco Transport Inc.

The plaintiffs allege that FXCM knowingly misled investors in its periodic reports filed with the SEC and other public statements by falsely claiming that its customers who transacted on FXCM’s “No Dealing Desk” platform would be free from conflicts of interest because FXCM would not be on the other side of the trade or have any financial interest in the trade.

However, FXCM incorporated and funded Effex and installed Dittami at the helm, while continuing to own the trading system, finance the business, and most importantly, maintain its 70% interest in Effex’s trading profits through thinly-veiled contractual arrangements. Effex even operated out of FXCM’s offices rent-free for the first year of its existence and had two FXCM employees dedicated to working for Effex.

During the Class Period, FXCM’s quarterly and annual reports misrepresented that FXCM had no interest in the trades executed on its NDD platform and therefore there were no conflicts of interest between FXCM and its customers who traded on the NDD platform.

FXCM’s financial statements violated SEC regulations and Generally Accepted Accounting Principles (“GAAP”) for failing to disclose FXCM’s economic interest in, contractual and related party relationship with, and control over, Effex during the Class Period. Given that FXCM was entitled to 70% of Effex’s profits, FXCM was required to (but did not) consolidate Effex’s operations as a variable interest entity. Alternatively, even if Effex were not required to be consolidated, it was still a related party to FXCM and therefore, FXCM was required to (but did not) disclose the related party nature of the business relationship and the amount of profits FXCM was earning from Effex.

As a result of FXCM’s failure to properly account for its arrangements with Effex, all of FXCM’s financial statements issued during the Class Period were false and misleading, the investors insist.

On February 6, 2017, the CFTC announced in a press release and accompanying Order that it had settled charges against FXCM and its two founders, Niv and Ahdout. The CFTC found that FXCM engaged in false and misleading solicitations of its retail FX customers by concealing FXCM’s relationship with its most important market maker, by misrepresenting that its NDD platform had no conflicts of interest with its customers, and by, essentially, cheating customers through dishonest trade execution. The Settlement imposed a civil penalty of $7 million and banned the Company from operating in the U.S.

This announcement shocked the market and caused the price of FXCM’s securities to lose more than half of their value, damaging FXCM investors.

• FXCM’s stance:

According to the defendants in this case, the investors ignore that FXCM’s outside auditors, Ernst & Young LLP (EY), opined that FXCM’s financial statements were not materially misstated during the Class Period. In fact, even after FXCM’s settlements with the CFTC and NFA, EY again opined that the financial statements contained in FXCM’s 2016 annual report were not materially misstated and did not require that any earlier annual or quarterly FXCM filing be restated based on Effex’s purported status as a variable interest entity or related party.

Furthermore, In the absence of an ownership interest, voting rights, or a variable interest based upon Effex’s profit or loss, the plaintiffs’ assertion that FXCM controlled Effex is implausible. Moreover, it is incorrect to consider Effex a variable interest entity or a related party of FXCM based solely on revenues from the Services Agreement.

Also, the very CFTC and NFA allegations that the plaintiffs rely upon demonstrate that the GAAP rules they describe were not violated, as nowhere in the CFTC Consent Order or NFA Complaint do the CFTC or NFA claim that FXCM violated GAAP.

Finally, the defendants argue that FXCM was not required to disclose ongoing regulatory investigations. Whereas the plaintiffs contend that various public filings were rendered misleading because the defendants did not disclose ongoing regulatory inquiries concerning Effex. However, as this Court ruled previously, “if plaintiffs seek to allege certain material omissions, they must allege a duty to disclose particular facts.” There is no such duty.

Let’s recall that, earlier in February, former clients of FXCM Inc saw the Court rule against them. The plaintiffs had argued that Effex had deprived them of positive slippage and had given them negative slippage—when it would benefit Effex’s and FXCM’s bottom line. The plaintiffs insist that Effex and Dittami knew FXCM intended to violate the CEA because they operated hand-in-glove. Also, without Effex’s participation, FXCM could not have violated the CEA. Because FXCM created Effex to secretly trade against its customers, Effex did more than “provide normal clearing services to a primary broker.”

The Court, however, sided with Effex in that case. According to the Court, the plaintiffs have failed to plead with particularity violations of the CEA and have also failed to state a claim.

It remains to be seen whether former FXCM Inc investors will manage to do better in their legal action.