“Stop writing letters”, Judge tells Effex Capital and ex-FXCM clients

The human ability to argue may be unbelievably persistent but it can also be annoying. Judge Paul A. Crotty of the New York Southern District Court, who is assigned to the case brought by former FXCM clients against the broker, a number of its executives and Effex Capital, has reached his tipping point. On Wednesday, May 30, 2018, the Judge denied a motion by the plaintiffs to file a sur-reply to the arguments raised by Effex Capital, the company involved in FXCM’s exit from the US retail FX market.

Let’s recall that the parties disagree over the interpretation of a part of the Commodity Exchange Act. Whereas Effex Capital and its CEO John Dittami argue that the CEA precludes the plaintiffs from bringing an action against Effex and Dittami, the plaintiffs disagree with such a statement.

Effex and Dittami say that the section that the CEA section that could be used against them does not extend to cover Eligible Contract Participants (ECPs) in transactions such as Effex to FXCM. But the former customers of the broker say that the defendants’ new argument appears to be that while the CFTC has jurisdiction to bring enforcement actions in retail forex transactions, an individual’s unambiguous statutory right to bring a private cause of action under the same statutory provision does not include such retail forex transactions.

The Judge did not feel enthusiastic about looking into this sparring. On Wednesday, May 30, 2018, he wrote a brief notice regarding the motions by the parties to file sur-replies and sur-sur-replies regarding the CEA interpretation. The Judge said the following:

“Both parties are advised to stop writing letters. There is no need for a sur-reply and the Court will consider only those arguments which have been made appropriately”.

The plaintiffs have brought the action on behalf of themselves and all other former customers of FXCM Inc; Forex Capital Markets, LLC; and FXCM Holdings, LLC, in an effort to recover the damages they and the Class suffered as a result of the alleged fraud perpetrated by Effex Capital, Dittami and FXCM. The customers say they were led to believe that FXCM provided a conflict-free retail Forex trading platform, whereas, in fact, the opposite was true: FXCM had a hidden relationship with Effex, which held positions opposite to orders placed by the Class and could (unlike other liquidity providers) view non-public details of those orders, and then engaged in abusive practices—all to the benefit of Effex, Dittami and FXCM.

The plaintiffs argue that Effex was central to this misconduct, as it was the secret liquidity provider that FXCM was penalized for concealing from its customers. Effex and Dittami should be held responsible for the damages they caused to the Class during the seven-year Class Period—which far exceed those identified by the CFTC, according to the ex-clients of the broker.

The plaintiffs stress that Effex deprived them of positive slippage and gave them negative slippage—when it would benefit Effex’s and FXCM’s bottom line. Two of the most egregious practices were the Hold Timer, and Previous Quote functions. Effex used both of these abusive practices to harm FXCM’s customers. Furthermore, all trades that were routed to Effex were denied best execution and the possibility of a better price—i.e. positive slippage—because the other liquidity providers were not allowed to compete to provide a better price to the traders.

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.”