• Southern District of New York Dismisses Securities Exchange Act Claims For Plaintiffs’ Failure To Allege Scienter
   

  08/29/2016
  On August 18, 2016, Judge Kimba Wood of the United States District Court for the Southern District of New York dismissed a putative class action against FXCM Inc., a currency brokerage firm, and its two co-founders, with leave to replead.  Ret. Bd. of the Policemen’s Annuity and Benefit Fund of Chi. v. FXCM Inc., 15-cv-3599 (S.D.N.Y. Aug. 18, 2016).  In dismissing plaintiff’s claims under Sections 10(b) and 20(a) of the Securities Exchange Act (the “Exchange Act”), the Court found that plaintiff failed to plead allegations sufficient to give rise to a strong inference of scienter, holding that the complaint failed to allege either “motive or opportunity” or “strong circumstantial evidence of conscious misbehavior or recklessness.”  Judge Wood’s decision joins the well-established Second Circuit precedent that plaintiff cannot meet the heightened pleading requirement merely by alleging that the defendant was motivated by a common desire to keep the corporation’s profits or by alleging “fraud by hindsight,” and confirmed that the standard for pleading scienter on the basis of recklessness is high.
  
  FXCM, which allowed its customers to trade currency pairs, used an “agency model” whereby it would collect the best prices on currency pairs for its clients and served as an intermediary on the trades.  FXCM also allowed its customers to trade with leverage, allowing them to trade with amounts much larger than their account balances deposited with FXCM, but limiting any losses to collateral deposited in the customers’ accounts.  FXCM protected itself from negative account balances by closing out a customer’s position if the changes in currency prices exhausted the collateral.  In January 2015, when the Swiss National Bank (SNB) announced that it was de-pegging its currency from the Euro, the Swiss Franc soared within minutes, and the volatility and extreme price changes prevented FXCM from closing out customers’ accounts before their collateral was depleted.  This in turn caused FXCM to incur $275 million of losses and to breach its regulatory capital requirements.  Ultimately, FXCM was forced to enter into a financing agreement with Leucadia National Corporation, and its stock price fell by over 90%.  Plaintiff – an institutional investor – claimed that FXCM misled investors about the low risk of its business model and its risk management procedures.           
  
  In dismissing the claims, the Court found that plaintiff failed to allege scienter on theories of (1) motive or opportunity, or (2) circumstantial misbehavior or recklessness.  First, the Court rejected plaintiff’s argument that motive or opportunity had been alleged sufficiently because of its allegations regarding one of the individual defendants’ and non-parties’ stock sales, as well as FXCM’s stock repurchase program.  The Court noted that (a) the other defendant co-founder never sold a share; (b) the stock sales were made over a year before SNB’s announcement to de-peg its currency; (c) non-party stock sales cannot give rise to an inference of fraudulent intent on the part of defendants; and (d) allegations regarding the stock repurchase program, without more, were meaningless to the analysis.  Second, the Court rejected plaintiff’s argument that FXCM was reckless when it disregarded communications from a confidential witness warning FXCM about its practices because the witness made contradictory statements regarding the likelihood of SNB de-pegging its currency and also significantly underestimated the potential consequences to FXCM.  
  Categories: Misstatement/Omission, Scienter
  

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• Ret. Bd. of the Policemen’s Annuity and Benefit Fund of Chi. v. FXCM Inc.