The US Commodity Futures Trading Commission (CFTC) has fined FXCM and its founding partners $7 million and ordered the firm to withdraw from doing business in the US for defrauding retail FX customers.
In an order issued today the Commission settled charges against FXCM, its parent company, FXCM Holdings, and two founding partners, Dror (“Drew”) Niv, and William Ahdout, who are the CEO and managing director of FXCM, respectively.
“The Order requires Respondents jointly and severally to pay a $7 million civil monetary penalty and to cease and desist from further violations of the Commodity Exchange Act and CFTC Regulations, as charged. FXCM, Niv, and Ahdout agree to withdraw from CFTC registration; never to seek to register with the CFTC; and never to act in any capacity requiring registration or exemption from registration, or act as a principal, agent, officer, or employee of any person that is registered, required to be registered, or exempted from registration with the CFTC,” it says in a release issued by the CFTC.
FXCM released its own statement, indicating that it has signed a non-binding letter of intent with Gain Capital Holdings, under which the latter will buy FXCM’s US customer accounts, subject to regulatory approval and final agreement.
“FXCM and Gain are working to determine the timing for the account transfer and expect to provide further information in that regard in the coming days. In 2016, FXCM’s U.S. business had unaudited net revenues of approximately $48 million and generated an EBITDA loss, but the costs associated with the business will not be transferring to gain. There will be no changes to FXCM customers outside of the United States,” says FXCM in its statement.
FXCM says that selling its US business will free approximately $52 million in capital and that the proceeds from the account sale and the release of capital will go toward repaying of FXCM’s loan from Leucadia National Corporation.
“FXCM wants to stress that these settlements have no impact on any customer of FXCM’s global businesses,” the firm says the statement.
In addition the firm has reached a settlement with the National Futures Association (NFA), which has no monetary fine. The named FXCM entities and principals neither admit nor deny the allegations associated with either of the settlements.
The CFTC order finds that, between September 4, 2009 though at least 2014, FXCM engaged in false and misleading solicitations of FXCM’s retail FX customers by concealing its relationship with its most important market maker and by misrepresenting that its “No Dealing Desk” platform had no conflicts of interest with its customers.
Specifically, the order says although FXCM, under Niv’s and Ahdout’s direction and control, told retail FX customers that when they traded on the firms No Dealing Desk platform, FXCM would have no conflict of interest, this was not the case. In fact, the court order says, FXCM had an undisclosed interest in the market maker that consistently “won” the largest share of FXCM’s trading volume – and thus was taking positions opposite FXCM’s retail customers.
The order alleges that FXCM formulated a plan in 2009 to create an algorithmic trading system, using an FXCM computer program that could make markets to FXCM’s customers, and thereby either replace or compete with the independent market makers on FXCM’s “No Dealing Desk” platform.
Although FXCM eventually spun off the algorithmic trading system as a new company, in actuality the company remained closely aligned with FXCM, according to the CFTC order. It says that this market maker received special trading privileges, benefitted from a no-interest loan provided by FXCM, worked out of FXCM’s offices, and used FXCM employees to conduct its business.
Further, the order finds that FXCM and the market maker agreed that the market maker would rebate to FXCM approximately 70% of its revenue from trading on FXCM’s retail FX platform.
In total, through monthly payments from 2010 through 2014, the company rebated to FXCM approximately $77 million of the revenue it achieved. However, FXCM did not disclose to customers, among other things, that this company – FXCM’s principal market maker – was a startup firm spun off from FXCM, according to the order.
In addition, the order also finds FXCM, FXCM Holdings, and Niv responsible for FXCM making false statements to the National Futures Association (NFA) about its relationship with the market maker.
It alleges that during a meeting between NFA compliance staff and FXCM executives, Niv omitted to mention to NFA the details of FXCM’s relationship with the market maker.
The CFTC order deems Niv and Ahdout to be “controlling persons” who were responsible, directly or indirectly, for FXCM’s violations. Niv is also held liable for FXCM’s false statements to NFA as a controlling person who was responsible directly or indirectly for those violations. FXCM Holdings is held liable for FXCM’s fraud and false statement violations as principal of FXCM, the order also finds.
“Full and truthful disclosure to customers and honest discourse with self-regulatory organisations such as NFA are vital to the integrity and oversight of our markets,” says Gretchen Lowe, principal deputy director and chief counsel of the CFTC’s Division of Enforcement. “Today’s action’s demonstrates that the CFTC is committed to protecting customers from harm in the markets it regulates.”