NY Court rules in favor of Drew Niv and FXCM Inc in “Black Swan” case

Maria Nikolova

A case which alleged that FXCM Inc and Drew Niv misled investors about the risks associated with FXCM’s business gets dismissed in New York.

Drew Niv and FXCM Inc, now known as Global Brokerage Inc (OTCMKTS:GLBR), have had a case against them dismissed in New York. Judge Kimba M. Wood of the New York Southern District Court has ruled in favor of the defendants in a lawsuit concerning the events around January 15, 2015.

The plaintiff – Retirement Board of the Policemen’s Annuity and Benefit Fund of Chicago, acting on behalf of the Policemen’s Annuity and Benefit Fund of Chicago, had brought this putative securities class action against FXCM Inc. (“FXCM”) and Dror Niv. The plaintiff alleged that FXCM and Niv had made material misstatements and omissions concerning risks in FXCM’s business. The defendants have moved to dismiss the plaintiff’s Second Amended Complaint for failing to adequately allege (i) that Defendants made a materially false statement, (ii) that Defendants acted with scienter, and (iii) loss causation.

In the latest court filings, seen by FinanceFeeds, the Judge grants the defendants’ motion to dismiss because the plaintiff has failed to adequately allege that FXCM and Niv made material misrepresentations or omissions and acted with scienter.

Let’s recall that the plaintiff in the case is an institutional investor that purchased FXCM common stock from March 17, 2014, up to and including January 20, 2015. It brought this putative class action on behalf of all those who purchased or otherwise acquired FXCM stock during the Class Period and were damaged thereby.

The plaintiff had alleged, in particular, that FXCM and Niv misled investors about the risks associated with FXCM’s business, especially with respect to the risks associated with FXCM’s “agency model,” FXCM’s leverage policies, and FXCM’s exposure to massive losses if the Euro were de-pegged from the Swiss Franc.

The Court found that the broker and its ex-CEO did not misled investors. FXCM’s statements in its 2013 10-K that it was a “riskless principal” and was “not exposed to market risk” were not materially misleading when viewed in the context of the document as a whole. In that context, it is clear that FXCM’s agency model did not eliminate all risk, but only certain types of risk. The document discloses, for example, that FXCM’s operations “involved risk of loss due to the potential failure of customers to perform their obligations under these transactions,” including the risk that “a customer’s losses exceed the amount of cash in their account.”

For these reasons, according to the Judge, no reasonable investor reading FXCM’s 2013 Form 10-K would have believed that FXCM’s agency model made it “riskless.”

Because FXCM fully explained the risk, a reasonable investor would have understood the risk to which FXCM was exposed, the Opinion & Order by Judge Wood says.

The plaintiff also alleges that FXCM and Niv made false statements that FXCM had a “fairly conservative margin policy,” “maintained a substantial pool of liquidity,” and “maintained excess regulatory capital.” These types of statements are not actionable, the Court says, because they are the types of general statements that investors are unlikely to rely on.

Regarding the plaintiff claims that because FXCM’s customers had a $2.2 billion position in the EUR/CHF pair, FXCM misrepresented that it had “no material changes in its risk factors”, the Court finds that this statement is too vague to be actionable.

Plaintiff also claims that as FXCM’s CEO, Niv must have known that FXCM was concealing an “enormous, highly-leveraged $2.2 billion long bet,” and thus must have known that FXCM’s statements about its risks were false. On its own, this allegation is not enough to show scienter, the Judge said. Although Niv’s knowledge of the $2.2 billion position shows that Niv was aware of the possible consequences of the EUR/CHF being de-pegged, it does not speak to the likelihood of that event occurring. To prove scienter, Plaintiff must allege Niv perceived the risk as a serious possibility at the time, not merely in hindsight. But the plaintiff admits that “industry participants” were “shocked” by the SNB “suddenly lifting the cap.”

Plaintiff claims that FXCM’s prior experience with losses from changes in the Japanese Yen and Russian Ruble must have alerted Niv to the risks inherent in FXCM’s business. The Second Amended Complaint also alleges, however, that FXCM survived that period of volatility. For this reason, as the Court previously noted, this fact weighs against a finding of scienter.

Plaintiff contends that scienter exists because Niv was aware “that other companies had raised margin requirements” with respect to the EUR/CHF pair. As the Court previously held, however, information about FXCM’s competitors “provides no information about Defendants’ conduct or knowledge.”

The fact that Niv made a different decision than his competitors shows nothing more than that he had a different business judgment, the Court finds.

If the plaintiffs disagree with a judgment or final order of the district court, they may appeal to the United States Court of Appeals for the Second Circuit. To start this process, they have to file a “Notice of Appeal” within 30 days after the judgment or order is entered on the Court’s docket.

Read this next

Digital Assets

Crypto.com enables Shopify merchants to accept crypto payments

Crypto.com has integrated with Canadian e-commerce giant Shopify so global merchants can accept crypto payments and save on processing fees through cash-final settlements.

Institutional FX

FX volume drops 13pct at CLS Group in April 2022

FX settlement specialist CLS Group today reported that the executed volumes of currency trading on its platforms were notably down in April.

Crypto Insider, Opinion

Regulation: The Gold-Standard for Crypto-Assets

When the US supervisory authority SEC allowed an investment product referencing Bitcoin futures to be traded for the first time last October, this was widely perceived as a signal that cryptocurrencies had finally become established as an asset class.

Executive Moves

Solid hires FX industry veteran Darren Barker for multi-bank ECN’s business development

His curriculum vitae includes former roles at Cantor Fitzgerald, Sucden Financial, R.J. O’Brien, Jefferies, Natixis, Unicredit, J.P. Morgan, Raiffeisen, RBS International, UBS, Deutsche Bank, and Citi. 

Inside View

Mihails Safro, xpate CEO: Tips sellers need to know to overcome compliance obstacles

The unprecedented growth of e-commerce changed shopping dramatically last year. Many sellers suddenly faced a rapidly growing number of customers who had to stay home during the lockdown. When some clients adopted Netflix and Spotify as part of a daily routine, others ventured into online business. Robinhood alone saw a whopping 6 million rise in user numbers in 2 months. 

Institutional FX

BMLL delivers Level 3 data to Kepler Cheuvreux for order book analytics and algo performance

The solution covers more than 6.5 years of harmonised historical data from 65 venues and combines it with easy to use APIs and analytics libraries in a secure cloud environment. 

Digital Assets

Crypto Is An Invaluable Tool In The Fight Against Financial Oppression  

Crypto has proven itself to be much more than just a hot investment. Indeed, some say it’s poised to play a critical role in the future of finance

Executive Moves

Parameta appoints Head of Benchmark and Indices with a focus on ESG and rates

The firm said building out its benchmarks & indices offering will now be a core priority, with a particular focus on the ESG and rates space.

Digital Assets

WunderTrading brings automated crypto trading to United States

“Among developed countries, Americans are the heaviest users of cryptocurrencies, with 13% having invested in cryptocurrencies over the past year.”

<