The lawsuit brought by investors in Global Brokerage Inc. formerly known as FXCM Inc, continues at the New York Southern District Court.
As indicated earlier, FXCM, Dror Niv and William Ahdout on September 9, 2021 submitted a Motion for Summary Judgment on all claims asserted by the plaintiffs, whether individually or as a class.
Let’s recall that this action dates back to February 2017. This case stems from the events from February 2017, when FXCM reached settlements with the CFTC and NFA, in a move that led to its exit from the US retail FX market. The price of FXCM’s securities plummeted after the regulatory settlements were announced, thereby damaging investors in FXCM Inc.
The second amended complaint (SAC) alleged that the defendants were responsible for false or misleading public statements with respect to FXCM’s agency trading model and FXCM’s order flow relationship with one of its market makers, Effex Capital LLC.
The second amended complaint also alleged that FXCM’s financial statements were false and misleading because the company had not consolidated Effex as a variable interest entity (VIE), or, in the alternative, disclosed Effex as a related entity. The complaint also alleged that FXCM had failed to properly disclose investigations by the CFTC and NFA regarding the Company’s relationship with Effex.
On March 28, 2019, the Court granted Defendants’ Motion to Dismiss in part, dismissing Plaintiffs’ claims against Defendant Robert Lande, FXCM’s former CFO. The Court also denied in part Defendants’ Motion to dismiss but limited the time period for all of the misstatements alleged by Plaintiffs to reflect FXCM’s publicly announced termination of its order flow arrangement with Effex as of August 2014.
Plaintiffs’ surviving allegations regarding Defendants’ misstatements and omissions fall into three general categories:
- (1) misstatements concerning FXCM’s agency model;
- (2) misstatements regarding Effex’s order flow payments to FXCM; and
- (3) misstatements and omissions concerning GAAP violations.
In their motion and supporting documents filed with the Court on September 9, 2021, the defendants argue that, “after more than two years of discovery in which Defendants produced tens of thousands of documents and the parties deposed 18 witnesses, Plaintiffs find themselves no closer to having evidentiary support for their claims that Defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5”.
The defendants say:
“What started as a copycat action, parroting the CFTC’s and NFA’s allegations of regulatory violations, has reached a dead end….The discovery record is devoid of evidence demonstrating that Defendants made any alleged material misstatements, that Defendants did so with the requisite scienter, or that the alleged material misstatements caused damage to Plaintiffs”.
FXCM, Niv and Ahdout explain that, at its core, Plaintiffs’ action is based on the following premise: that Effex’s agreement to pay FXCM a fixed-dollar amount for order flow was really a profit-sharing agreement and that FXCM and Effex were virtually one and the same. This is simply incorrect, according to the defendants.
The discovery record also confirms that Effex and FXCM operated independently throughout the Class Period. Indeed, John Dittami, the founder and Chief Executive Officer of Effex, has repeatedly stated under oath that, during the Class Period, Effex: (1) managed its own business, maintained its own payroll, opened its own offices, and maintained its own bank accounts; (2) had trading relationships with dozens of counterparties besides FXCM and Effex never paid FXCM for any business Effex transacted with non-FXCM counterparties; and (3) had the obligation to absorb its own losses and the right to its own profits. Importantly, it is undisputed that the Services Agreement was terminated in August 2014 – halfway through the Class Period – at which point Effex no longer made payments for order flow to FXCM. This termination was publicly disclosed in August 2014.
The defense argues that:
“More than two years later, when Defendants’ settlements with the CFTC and NFA were announced in February 2017, Plaintiffs jumped on the opportunity to leverage a no-admit, no-deny settlement (composed of mere allegations of no evidentiary value) into a class action pay day. But discovery has robbed Plaintiffs of any leverage they once had. Now, Defendants are entitled to judgment as a matter of law because the undisputed facts demonstrate Plaintiffs cannot show that there is a genuine issue as to any material fact relating to any of their claims”.
Regarding the alleged economic loss caused to the plaintiffs, the defendants explain that starting in January 2015, and after the alleged misstatement period, FXCM experienced dramatic changes in its business and financial condition unrelated to the alleged misstatements that dramatically affected the value of its securities. In particular, as a result of the SNB Flash Crash on January 15, 2015, FXCM customers with long positions in the euro/Swiss franc currency pair lost more than $275 million.
FXCM, in turn, faced a possible breach of its regulatory capital requirements, and to avoid liquidation it was forced to secure an emergency $300 million loan from Leucadia. Within days of the SNB Flash Crash and the Leucadia bailout, the price of FXCM’s common stock declined by nearly 90%, from $167 per share on January 15 to $16 per share on January 20, and the FXCM Notes traded substantially below par thereafter. And the price of FXCM’s Securities never returned to their previous trading levels during the Class Period.
Given all of these factors, it will be impossible for Plaintiffs to prove loss causation, the defendants say.
Further, the defendants argue that, given the dramatic decrease in the price of the FXCM Securities as a result of the SNB Flash Crash and Leucadia bailout, Plaintiffs fail to explain how the prices of those securities were still inflated as of February 6, 2017, especially given the lack of an alleged misstatement or omission concerning the period after August 2014.
“Nor do Plaintiffs explain how investors who purchased after the termination of FXCM’s order flow relationship with Effex, a development that was disclosed prior to the SNB Flash Crash, could have sustained losses attributable to a prior alleged misstatement or omission about the terminated pay-for-flow agreement with Effex,” the defendants say.
Also, FXCM repeatedly disclosed the risk of regulatory inquiries, the defendants note. Moreover, the Court has already dismissed the plaintiffs’ claims that the defendants should have disclosed the CFTC and NFA investigations while they were ongoing, holding that “there is no independent duty for a company to disclose that it is being investigated by a regulatory agency,” and that “companies do not have an affirmative duty ‘to speculate or disclose uncharged, unadjudicated wrongdoings or mismanagement.”
The defense also argues that the plaintiffs fail to point to evidence that Niv or Ahdout were “culpable participants” in a fraud. Culpable participation “requires ‘particularized facts of the controlling person’s conscious misbehavior or recklessness.”
For all the reasons stated above, the defendants argue that their motion for summary judgment should be granted in its entirety.