FXCM Inc, Drew Niv push for review of summary judgment order
William Ahdout, Dror Niv and FXCM Inc, now known as Global Brokerage Inc, have asked the New York Southern District Court to certify its order denying summary judgment on the issue of “loss causation” for immediate interlocutory appeal. The relevant documents were submitted by the defendants on September 20, 2022.
Ahdout, Niv and FXCM Inc are defendants in a securities class action arising from alleged misleading statements that FXCM made in public filings. The plaintiffs claim that FXCM misled investors because it failed to disclose a financial interest it held from 2010 to 2014 in Effex, a market maker that “won” the largest share of certain kinds of FXCM’s trading volume.
According to the plaintiffs, the truth of this financial relationship was revealed on February 6, 2017, three years after the relationship ended, when news that FXCM had entered into a settlement with the Commodity Futures Trading Commission (CFTC) and National Futures Association (NFA) relating to its relationship with Effex became public.
FXCM Inc notes that the news was announced on the same day that FXCM also announced severe regulatory penalties, including a civil monetary penalty of $7 million and that it would withdraw from providing Forex trading services in the United States. FXCM also announced that same day plans to lay off 18% of its workforce.
Even though FXCM’s financial relationship with Effex ended in 2014, Plaintiffs claim that they were damaged through an inflated stock price up until the news of such relationship was announced on February 7, 2017.
Plaintiffs’ expert, Adam Werner, opines that “the alleged misrepresentations and omissions caused the prices of the FXCM stock and FXCM Notes to be artificially inflated over the course of the Class Period.” He calculates a price decline on February 7, 2017, of $3.39 per share for the FXCM common stock and $16.31 per $100 of par for the FXCM Notes, and then applies those dollar amounts over the class period.
According to the defendants, Werner’s analysis, does not parse what price decline might have been caused by the revelation concerning FXCM’s former financial relationship with Effex (which could be recoverable under the securities laws) and what was caused by news of the severe regulatory penalties and the laying off of 18 percent of FXCM’s workforce. Instead, Werner assumes that the regulatory and other ramifications associated with the information concerning FXCM’s financial relationship with Effex were the “inextricable ramifications” of the corrective disclosure.
At summary judgment, FXCM challenged Plaintiffs’ failure to disaggregate the regulatory penalties from the other pieces of information announced on February 7, 2017. As FXCM explained in its briefing, a jury cannot tell from Werner’s cumulative number what part of the damages “was caused by fraud”—for instance, the failure to disclose a prior financial interest in Effex—and what part was caused by the other news announced on February 7, 2017—the payment of a $7 million civil monetary penalty, closure of FXCM’s US trading operations, and layoff of 18 percent of its workforce.
The Court considered these arguments but nevertheless denied summary judgment on August 17, 2022. The Court acknowledged that Plaintiffs have the burden to establish loss causation, and that Plaintiffs must “show that their loss was caused by the fraud and not by other intervening events.”
And the Court agreed that “to the extent Plaintiffs raise a ‘materialization of risk’ theory and characterize the risk as the risk of regulatory penalties, this theory fails.” The Court explained that “the risk must be concealed by the misrepresentations and omissions alleged” and that regulatory penalties were not a concealed risk under that theory as a matter of law.
The Court nevertheless declined to apply this reasoning to Plaintiffs’ “corrective disclosure” theory, which this Court understood to “argue that loss causation can be shown by the market reaction to the February 2017 announcements disclosing the alleged fraud.”
The Court acknowledged that Plaintiffs “have the burden to disaggregate losses caused by disclosures of the truth behind the alleged misstatements from losses caused by non-fraud-related factors.” But it decided that it would “allow a jury to decide whether or not [the regulatory penalties] are confounding events that needed to be disaggregated” rather than decide that question as a matter of law.
The defendants argue that whether a plaintiff may recover losses that result from regulatory penalties imposed on the defendant because of the alleged securities fraud is an important legal question that has significant implications for this case and other securities litigation. And notwithstanding the Court’s opinion, judges could disagree—indeed, have disagreed—with the Court’s answer.
The Court should certify its Order for interlocutory review, the defendants conclude.