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US Court Dismisses Fraud Claims Against FXCM

A US court has granted a motion to
dismiss the legal complaints aimed at FXCM, and certain members of its senior
staff, in which the plaintiff alleged that they were mislead about the risks
associated with the firms’ agency business model.

The complaint, directed at FXCM, its
CEO, Drew Niv and its CFO, Robert Lande, claims that these defendants “made a
number of materially false or misleading statements or material omissions” about
how FXCM operated its business.
 

“In particular, plaintiff alleges that
defendants misled investors about the “low risks” of their “agency” business
model, especially in light of FXCM’s leverage policies and enormous risks in
relation to the EUR/CHF currency pair,” it says in the document issued today by
the US District Court in the Southern District of New York.

The plaintiff also alleges that the
defendants lacked a risk management department to manage their risk and that
“FXCM’s large losses after the SNB’s decision revealed a risky business
strategy coupled with insufficient risk management procedures, causing hundreds
of millions of dollars of losses to plaintiff and the class”.

In the original complaint the plaintiff
was pointing to section 10(b) of the Exchange Act and alleging that there has
been a securities fraud violation by the defendants.

Key to the case was the need for the
plaintiff to prove “scienter”, meaning that they had to prove that the
defendants had knowledge of the “wrongness” of their actions prior to
undertaking them.

Yet in its analysis of the case the
court concludes: “Taken collectively, plaintiff’s allegations fail to support a
strong inference that defendants acted with scienter. At best, plaintiff’s
allegations permit a weak inference of scienter—one that is less compelling
than the inference that defendants were blindsided by the SNB’s decision”.
 

Because the complaint did not raise a
strong inference of scienter by alleging motive and opportunity, the strength
of the circumstantial evidence needed to be greater in order to plead scienter as
part of the conscious misbehavior or recklessness definition of the legal term.
Yet the court decided that the allegations “fail to meet this standard”.

It then adds: “Because plaintiff fails
to adequately plead scienter, the court need not reach the issue of loss
causation” and that the plaintiff’s other claims fail as a result.
 

The court thus dismissed all the claims
FXCM and its executives, but the plaintiff has 30 days to amend the complaint
if they wish to do so.

 

galen@profit-loss.com

@Galen_Stops

@Profit_and_Loss

Galen Stops

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