Plaintiffs in “mega lawsuit” against FXCM Inc seek class certification

The plaintiffs in the so-called “mega lawsuit” targeting Global Brokerage, Inc. formerly known as FXCM Inc. (“FXCM” or the “Company”), Dror Niv, and William Ahdout, have requested class certification.

On January 6, 2020, the motion for class certification was filed with the New York Southern District Court by the lead plaintiffs in this case – 683 Capital Partners, LP and Shipco Transport Inc., and additional named plaintiff Sergey Regukh.

The plaintiffs are pursuing claims on behalf of a class of FXCM investors under §§ 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) against FXCM; Dror Niv, FXCM’s co-founder, CEO, and Chairman of the Board; and William Ahdout, FXCM’s co-founder, Chief Dealer, Managing Director, and director.

The proposed Class is defined as:

• “All persons and/or entities that purchased or otherwise acquired publicly traded Global Brokerage, Inc., f/k/a FXCM Inc. (“FXCM”) securities, including FXCM 2.25% Convertible Senior Notes due 2018 and Class A common stock, during the period March 15, 2012 through February 6, 2017, both dates inclusive”.

Excluded from the Class are:

• “(i) Defendants; (ii) current and former officers, employees, consultants and directors of FXCM and FXCM Holdings, LLC; (iii) siblings, parents, children, spouses, and household members of any person excluded under (i) and (ii); (iv) any entities affiliated with, controlled by, or more than 5% owned by, any person excluded under (i) through (iii); and (v) the legal representatives, heirs, successors or assigns of any person excluded under (i) through (iv)”.

The plaintiffs allege that, for years, FXCM claimed that its “No Dealing Desk” (“NDD”) platform provided its customers with retail Forex trading that was free of conflicts of interest. Unlike other forex trading platforms, FXCM claimed that it had no financial interest in NDD trades. Instead of trading against its customers, FXCM purported to act merely as an agent, collecting small markups and routing customers’ trades to independent “market makers” that provided liquidity to the platform. These assurances, according to the plaintiffs, were false.

In 2009, FXCM began to develop a high frequency trading algorithm to trade against unsuspecting customers on its NDD platform. As FXCM prepared to go public in 2010, the company’s compliance department voiced serious concerns over trading against FXCM’s customers while explicitly promoting the NDD platform as “conflict-free.” To avoid scrutiny, FXCM spun off the trading operations as a purportedly “independent” company, Effex Capital, LLC.

In truth, the plaintiffs say, FXCM created Effex as a functional subsidiary. FXCM installed John Dittami, who had overseen development of the trading algorithm, to head Effex. FXCM entered into a sham “services agreement” by which it would retain 70% of Effex’s trading profits, disguised as “order flow” payments. FXCM also provided Effex with millions in start-up capital, allowed Effex to operate out of FXCM’s offices rent-free, and designated two FXCM employees to work for Effex. Through 2014, Effex had sent nearly $80 million of its trading revenue to FXCM, the plaintiffs’ complaint alleges. At the same time, FXCM had no similar arrangements with, and received no payments from, any other market maker.

Eventually, the United States Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) brought regulatory actions against FXCM based on the brokerage’s undisclosed relationship with Effex. On February 6, 2017, the CFTC announced that it had banned the company from operating in the US after finding that FXCM was taking undisclosed positions opposite its retail customers. The CFTC issued an Order which required FXCM, Niv and Ahdout to pay a $7 million civil penalty, cease and desist from further violations of the Commodity Exchange Act and CFTC Regulations, and permanently withdraw from CFTC registration. The same day, NFA also issued an order against FXCM, Niv, Ahdout, and Niv’s sister, Ornit Niv.

In response to the CFTC and NFA orders, the price of FXCM’s stock and the FXCM Notes dropped sharply, damaging investors.

Tony Khoury filed the first of four related shareholder actions against FXCM on February 7, 2017. In May 2017, the Court consolidated the related actions, appointed 683 Capital and Shipco as Lead Plaintiffs, and appointed the Rosen Firm as Lead Counsel. The plaintiffs filed their Consolidated Securities Class Action Complaint on June 19, 2017. The defendants moved to dismiss the first amended complaint on August 3, 2017 After briefing, the Court granted the motion to dismiss without prejudice on March 1, 2017. The plaintiffs then filed the second amended complaint on April 6, 2018. The defendants moved to dismiss the second amended complaint on May 7, 2018.

After briefing, the Court issued an Order on March 28, 2019 denying in part the defendants’ motion to dismiss as to Defendants FXCM, Niv, and Ahdout.

The Court concluded back then that the second amended complaint adequately alleges that the remaining defendants have committed securities fraud with respect to statements or omissions concerning FXCM’s supposed agency-trading model, the Company’s purported “order flow” payments with Effex, and Generally Accepted Accounting Principles (“GAAP”). The Court thus denied the motion to dismiss as to FXCM, Niv, and Ahdout.

The Court determined that the second amended complaint plausibly alleges that FXCM misled investors in its public filings with respect to its purported agency-trading model, but only from the beginning of the Class Period until the end of its order flow arrangement with Effex in August 2014.

The Court stated that:

“Regardless of whether FXCM’s arrangement with Effex was standard in the industry and was in compliance with the relevant regulatory requirements, if Plaintiffs are correct, FXCM may have misled their customers by portraying such payments as order flow payments rather than as a profit-sharing arrangement with Effex”.

The lawsuit continues at the New York Southern District Court.