Following the release of their Q4 and Full Year 2013 results last month, GAIN Capital has published their 10-K Annual Report filing with the SEC this week. For 2013, GAIN’s performance was punctuated by their acquisition of GFT which was well documented throughout much of last year. As such, the Annual Report didn’t provide much in the way of surprises about GAIN’s 2013 performance or the GFT acquisition, but did provide some additional details taking place at the firm. Among the key items was an update on the Cameron Farley case.
Litigation –In an ongoing case that began in 2012, GAIN Capital is facing litigation from former investors of Cameron Farley Ltd, an unauthorized UK-based financial firm that committed fraud and lost £13m of customer funds, but had been a corporate account holder of GAIN at the time of being shut down by regulators in 2008. In its Letter of Claim, the suit alleges that GAIN held responsibility in the fraud in part due to allowing Cameron Farley, a non-FSA authorized firm to trade and manage client funds. In response, GAIN filed a ‘strike out and or summary judgment’ in March of 2013, to withhold the case from going to trial on grounds that it had no merit. Following a back and forth of additional filings by each party last year, the judge denied GAIN’s motion for a strike out and summary judgment.
In reaction to the verdict, GAIN stated that “On February 26, 2014, the judge denied our motion for strike out/summary judgment. We can provide no assurances that this matter will be successfully resolved. This matter is currently pending. At this time, a potential loss or a potential range of loss cannot be reasonably estimated.” Following up on the case and whether GAIN Capital would seek a settlement with the former Cameron Farley investors or go to trial, a representative of the broker stated to Forex Magnates that they couldn’t comment on the matter.
Speaking on the matter, Forex Magnates reached out to Robert Morfee, Consultant at Clarke Wilmott LLP, whose firm is leading the case for the plaintiffs. According to Morfee, the decision to deny GAIN’s motion is no assurance that the plaintiffs will succeed in their case as much as that they had an “arguable case” that was worthy of going to trial. He added that beyond just GAIN Capital and Cameron Farley investors “the decision is of general importance for those who engage in providing cross border financial services.”
Explaining the case, Morfee stated that “The plaintiffs sue under specific provisions of UK law deriving from EU regulations on the financial services industry. These provide that only authorised businesses and personnel can provide financial services in the EU, including the UK. There are rights to restitution and damages granted to investors to be enforced against those who breach this “general prohibition” against unauthorised financial services.” He added that “plaintiffs had all lost money because of the unauthorised activities of Cameron Farley Ltd” which had been conducted on GAIN’s forex trading platform. On this claim, Morfee stated that GAIN argued that “To the effect that they were not to be answerable for what Cameron Farley did. Gain were in New Jersey, and at all material times had no operation in the UK. Their business was done via the internet.” Representation for both the plaintiffs and defendants was also cross-boundary with both sides having evidence displayed by UK and New York-based attorneys and company officials.
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According to Morfee, Mr. Justice Walker, the preceding judge, decided that despite contracts between GAIN Capital and Cameron Farley that stated that the investment manager wasn’t an agent of the broker and that the agreement between them “stipulated that the applicable law was New York law”, the contracts may not be enforceable under UK law.
Overall, Morfee concluded that “The message is this. If you do business in another country, whatever the terms of your agreements with your contacts in that country, you must follow that country’s laws. Most Americans would not find this a strange concept when applied to those foreigners doing business in the USA. It cuts both ways.”
In GAIN Capital’s defense, the broker isn’t the only one being blamed, as plaintiffs have also pointed figures at UK financial regulators for failing to shut down Cameron Farley earlier when it was first discovered they were operating without authorization.
Partnerships – For the year, GAIN reported that partnerships composed 39% of retail volumes. Partnership volumes include clients from both Introducing Broker (IB) and White Label (WL) customers. At the time of GAIN’s acquisition of GFT, stated by the broker that “The combined company will source approximately 52% of its retail volume from partners, with the remaining 48% coming from direct retail clients.” In addition, it was estimated that prior to the deal, GAIN’s portion of partnership volumes were 35%. Factoring in two full months of GFT’s contribution to overall retail volumes, the 39% figure is in line with GAIN’s forecasts. Tracking the performance of the acquisition, the breakdown of partnership volumes will become a proxy as to the success of the deal in GAIN maintaining ties with GFT’s IBs and WLs.
Interesting Figure – Among other items that were of note, an interesting figure was that GAIN stated that “50% of volumes in Jurisdictions not currently licensed or authorized by the local government or applicable self-regulatory organization.” The statement was in reference to potential risks, as new laws in these jurisdictions could lead the firm to require additional licensing and capital minimums. More than anything, the 50% figure represents that much of GAIN’s retail client base is from developing countries where forex trading remains under the radar of local regulators.
Kapitall – Also noted in the Annual Report was that GAIN Capital’s 2011 investment in Kapitall had become impaired and was reevaluated at $50,000 from $500,000. A US-based equities investment trading platform startup, Kapitall recently announced that it had received $13 million in new financing which was dilutive to previous owners of equity in the company. Although not a core stake for GAIN Capital, Kapitall was viewed as a strategic asset in part of the broker’s long-term goal of diversifying its revenue stream.