Nguyen v. FXCM Inc.

• Decision Date: 01 February 2019
• Docket Number: Case No.: 1:17-cv-2729-PAC-HBP, Case No.: 1:17-cv-4699-PAC-HBP
• Citation: 364 F.Supp.3d 227
• Parties: Vantalie NGUYEN, Individually and On Behalf of All Others Similarly Situated, Plaintiff, v. FXCM INC., Forex Capital Markets, LLC, FXCM Holdings, LLC, Dror Niv, William Ahdout, John Dittami, and Effex Capital, LLC, Defendants. Arthur P. Cardi, Bikram Randhawa, Mark Govers, Steven Plunger, and Rosimara Tadrous, Individually and On Behalf of All Others Similarly Situated, Plaintiffs, v. FXCM Inc., Forex Capital Markets, LLC, FXCM Holdings, LLC, Dror Niv, William Ahdout, John Dittami, and Effex Capital, LLC, Defendants.
• Court: U.S. District Court — Southern District of New York

364 F.Supp.3d 227

Vantalie NGUYEN, Individually and On Behalf of All Others Similarly Situated, Plaintiff,

v.FXCM INC., Forex Capital Markets, LLC, FXCM Holdings, LLC, Dror Niv, William Ahdout, John Dittami, and Effex Capital, LLC, Defendants.

Arthur P. Cardi, Bikram Randhawa, Mark Govers, Steven Plunger, and Rosimara Tadrous, Individually and On Behalf of All Others Similarly Situated, Plaintiffs,

v.FXCM Inc., Forex Capital Markets, LLC, FXCM Holdings, LLC, Dror Niv, William Ahdout, John Dittami, and Effex Capital, LLC, Defendants.

Case No.: 1:17-cv-2729-PAC-HBP

Case No.: 1:17-cv-4699-PAC-HBP

United States District Court, S.D. New York.

Signed February 1, 2019

Gregory M. Egleston, Thomas James McKenna, Gainey McKenna & Egleston, Shannon Lee Hopkins, Levi & Korsinsky, LLP, New York, NY, for Plaintiff.

Israel Dahan, King & Spalding LLP, Joseph Noah Paykin, Hinman, Howard & Kattell, LLP, New York, NY, for Defendants.

OPINION & ORDER

HONORABLE PAUL A. CROTTY, United States District Judge:

This is a consolidated securities class action¹ , alleging that Defendants failed to disclose a conflict with Effex Capital, LLC ("Effex"), the leading foreign currency exchange ("forex") trading platform for FXCM, Inc., Forex Capital Markets, LLC, and FXCM Holdings, LLC (collectively, "FXCM"). According to Plaintiffs, FXCM hired Defendant John Dittami to create the forex trading platform Effex, which FXCM spun off but retained control over. FXCM presented its forex trading system as designed to produce better results for customers because, unlike the "dealing desk" model, it was inherently conflict-free. But Plaintiffs claim that these representations hid an obvious conflict with Effex, which was winning the majority of orders over banks and other "market makers" because it had secret access to view customers' orders, despite FXCM's promises of anonymity. Plaintiffs also allege that FXCM, through Effex, took positions opposite clients in stark contradiction with FXCM's marketing and engaged in harmful practices that violated the duties and obligations owed to its customers. According to Plaintiffs, Effex and Dittami acted under the direction of FXCM and aided and abetted FXCM's fraud.

In 2017, FXCM entered into settlements with the Commodity Futures Trading Commission ("CFTC") and National Futures Association ("NFA") regarding these practices and undisclosed relationship with Effex, and FXCM agreed to withdraw from operating in the United States.

On October 26, 2017, this Court stayed this action pending arbitration as to claims against Defendants FXCM, Dror Niv, and William Adhout, but not with respect to claims against Defendants Effex and Dittami. (Dkt. 37.) Accordingly, only the six counts (out of eleven total) alleged against Effex and Dittami are at issue here: Counts II, III, IV, V, VI, and X.

Defendants Effex and Dittami move to strike references to settlements with the CFTC and NFA and move to dismiss the six counts at issue pursuant to Rules 9(b) and 12(b)(6) of the Federal Rules of Civil Procedure. After careful consideration of the pleadings and briefing, the Court DENIES the motion to strike and GRANTS the motion to dismiss without prejudice.

BACKGROUND

I. FXCM Develops No Dealing Desk Model

According to the Amended Consolidated Class Action Complaint (Dkt. 48) ("Complaint" or "Compl."), FXCM was an online provider of forex trading services that offered a platform for customers to invest in the forex market—the largest and most actively traded financial market in the world. (Compl. ¶¶ 55, 57.) Forex trading involves the exchange of one currency for another. (Id. ¶ 56.) Trades on the forex market usually occur in over-the-counter transactions with a dealer rather than through a central exchange, making them less regulated, more reliant on the "market makers" or dealers who buy and sell currencies, and more susceptible to manipulation than trading in other markets. (See id. ¶¶ 55-56, 65-67.)

In 2007, FXCM transitioned from a "dealing desk" model for executing forex trades, in which a division of FXCM determined prices offered and took positions opposite to customers, (id. ¶ 59), to an "agency" or "no dealing desk" ("NDD") model, in which price quotations were provided by third-party market makers to customers whose orders were to be kept confidential, (id. ¶ 60).

II. Effex Becomes Market Maker For FXCM

In 2009, FXCM hired a high frequency trader, Dittami, to create a high frequency trading algorithm for the new NDD model. (Id. ¶¶ 102-03.) Dittami's contract with FXCM guaranteed him a base salary plus 30% of any profits generated by the system, with FXCM retaining the remaining 70% (the "Rebate Payments"). (Id. ¶¶ 103-104.) In 2010, this high frequency trading system spun off from FXCM and became a new company—Effex—where Dittami went to work with the same profit-splitting agreement. (Id. ¶¶ 106-108.) Though Dittami had technically resigned from FXCM, he continued to work at FXCM's offices in New York rent-free for a year and use FXCM's servers and email systems. (Id. ¶¶ 110-11.)

Effex paid FXCM monthly for order flow through the Rebate Payments.² (Id. ¶ 113.) FXCM allowed Effex to win all ties with other market makers, shared other market makers' price quotations with Effex, and added smaller markups to Effex's prices than it added for other market makers. (Id. ¶ 117.) As a result, Effex won a disproportionately higher percentage of orders compared to other market makers, potentially depriving customers of better prices. Effex's monthly payments to FXCM totaled nearly $ 80 million, and Effex captured over 50% of FXCM's daily order flow. (Id. ¶ 140.)

III. FXCM's Relationship With Effex

FXCM was not forthcoming about its relationship with Effex. (See Compl. ¶ 90.) For example, in its 2010 Annual Report, FXCM included a graphic showing the percentage of volume of each liquidity provider on the NDD platform: BNP (13.5%); Citi (8.0%); Citi-Prime Broker (All Others) (35.8%); Deutsche Bank (3.5%); Dresdner (13.3%); Goldman (14.4%); JP Morgan (3.6%); Morgan Stanley (8.0%). (Id. ¶ 145.) The 35.8% of trades executed by "Citi-Prime Broker (All Others)" was mostly, if not completely, attributable to Effex. (Id. ¶ 147.)

In September 2012, in a rare if not singular public recognition of any relationship with Effex, FXCM's Brand Ambassador stated on an online forum that "FXCM does not own [Effex], nor do they have control over what orders can go to other liquidity providers." (Id. ¶ 149.)

IV. FXCM's Representations about NDD³

According to FXCM, the NDD model was at the "heart" of FXCM's business, (id. ¶ 82), and was uniquely suited to eliminate conflicts of interest and price manipulation, providing a better result for the customer, (see id. ¶¶ 61, 77, 78, 81, 83, 85, 162, 164, 166, 168, 170). The NDD model was supposed to anonymize customers' orders so that market makers would compete to offer the best available price to customers and could not stake out positions contrary to customers. (See id. ¶ 79.) At the same time, as FXCM explained in its client agreements with Plaintiffs, the NDD model was supposed to be transparent and fair, because FXCM's profits depended on standardized markups, rather than taking positions contrary to customers. (Id. ¶¶ 60, 81, 94, 95-97.) To put it in FXCM's own words from its website⁴ :

FXCM makes an identical amount of money in the form of pip markups (which are really commissions) regardless of whether the customer made or lost money on the account. FXCM receives prices from global banks, financial institutions, and other market makers in the foreign exchange markets. A best bid/offer engine sorts those prices and marks them up with our standard markup on the majors. This markup acts as the commission on the trade. When a customer clicks on a price, they are actually clicking on a price from the bank that currently has the best bid or offer, plus our markup. Given that we make money on a per trade basis, we are motivated to encourage size and high frequency and it is why we offer extra incentives to clients. It's also why we dedicate a lot of resources in trying to improve client profitability so they have the money to stay around and trade in bigger sizes. We don't benefit from customer losses.

(Id. ¶ 159.)

FXCM also represented that the NDD model was superior because it could pass on price improvements to customers by mitigating "negative slippage"⁵ and/or realizing the benefits of "positive slippage."⁶ (Id. ¶¶ 86-87.) Plaintiffs assert that FXCM's main selling point throughout the class period⁷ can be summed up by the following quote taken from FXCM's website in December 2016:

With NDD, FXCM acts as a price aggregator. We take the best available bid and best ask prices from our liquidity providers—global banks, financial institutions and other market makers—and stream those prices to your platform. This large, diverse group of liquidity providers makes this model special: The more advantageous the prices, the more order flow the provider receives. Through competition, NDD ensures prices are market-driven and fair.

(Id. ¶ 144.)

V. Effex Implements Allegedly Abusive Practices

A. Hold Timer

At some point, Effex began to take advantage of the benefits of positive slippage in the market rather than passing them along to customers through the use of a Hold Timer, which permitted Effex to delay order execution for a period of time (milliseconds in duration), providing Effex with a "last look" at the order so that it could execute the trade if the market price moved favorably, or reject the trade if it moved unfavorably. (Id. ¶¶ 122-24.) Because Effex was taking positions opposite the customer, the Hold Timer and "last look" allowed Effex to selectively execute trades: where the price at the end of the Hold Timer had moved against Effex and in favor of the customer, Effex could reject the trade, but where the price had moved in favor of Effex and against the customer, Effex could execute the trade and pass negative price...