Court Dismisses SNB Related Class Action Lawsuit Against FXCM
The court has given the plaintiffs 30 days to file an amended complaint if they so choose.
A New York district court has just dismissed a class action lawsuit by some shareholders of FXCM Inc, which accused the company of scienter in the aftermath of the Swiss National Bank turmoil in 2015. The plaintiffs included a pension fund from Chicago.
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The plaintiffs in the case alleged that FXCM misled investors by claiming that its agency business model is less risky. In addition the lawsuit was charging some other executives in the company, including the broker’s CEO Drew Niv, with scienter. The allegations went as far as to say that FXCM had no risk management department nor any protocols that manage risk.
In the aftermath of the SNB’s decision to scrap the EUR/CHF floor at 1.20, FXCM was forced to seek a bailout loan from Leucadia National to cover its losses to the tune of $275 million. However unfortunate this situation was, the company’s CEO Drew Niv hadn’t sold any of his more than 8 million shares in the company before the event. In fact the value of his stock holdings went south over $100 million in the aftermath of the bailout loan which the company secured at a great cost.
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Scienter Allegations not Founded on Facts
With numerous market participants being caught off guard during the SNB turmoil, the allegations that the company had somehow deliberately mismanaged the situation did not appease the court which has given the plaintiffs 30 days to file an amended complaint if they so choose.
In relation to the financial damages which were incurred by senior management at FXCM the court states: “The Plaintiff never provides an explanation or even addresses these losses or how they impact its scienter allegations.”
The decision of the court doesn’t come as a surprise, but is especially interesting in light of the recent allegations by the CFTC of undercapitalization and failure to report this violation in a timely manner, and failure to guarantee against customer losses. With the class action lawsuit being filed over a year ago, the action taken by the CFTC over a year and a half after the unfortunate SNB event looks puzzling to say the least.
The company’s response to the allegations has outlined disappointment with the actions undertaken by the CFTC over 20 months after the SNB crisis which hit the whole foreign exchange industry and caused a number of bankruptcies. The company was the heaviest hit and at the same time the most resilient in light of the fact that it did manage to secure a $300 million loan from Leucadia National at a great cost to the shareholders which include all senior executives at the firm.
I agree the CFTC action was late and perhaps vindictive. And no broker knew exactly when SNB would have occurred. But several brokers did correctly realize that CHF exposure could hurt their books if a [then hypothetical] removal of the peg should occur and scaled back leverage on all CHF pairs several months in advance.
But was guaranteeing against negative client balances for an agency model broker + offering up to 1:400 leverage really acting in the best interest of shareholders.
Hahaha, i worked for FXCM for 10+ years and if those lawyers knew what I knew. They had a case but they have no idea where to really look. Oh well.