|Brendan Callan, CEO|
|Services||Financial broker, foreign exchange|
|Parent||Leucadia National Corporation|
FXCM, also known as Forex Capital Markets, is a retail foreign exchange broker, now run from London after being banned from United States markets for defrauding its customers. Its former parent company, Global Brokerage, Inc. filed for bankruptcy on December 11, 2017. The operating company, known as FXCM Group, is now owned by Jefferies Financial Group, which changed its name from Leucadia National Corporation in 2018.
FXCM allows retail clients to speculate on the foreign exchange market and provides trading in contract for difference (CFDs) on major indices and commodities such as gold and crude oil. Global Brokerage shareholders lost over 98% of their investment since January 2015.
On February 6, 2017 the firm agreed to pay a $7 million penalty to settle a suit from the U.S. Commodity Futures Trading Commission (CFTC) involving fraudulent misrepresentation by FXCM to its customers and to regulators. FXCM withdrew its CFTC registration and agreed not to re-register in the future, effectively banning it from trading in the United States. Three top managers resigned under regulatory pressure and the majority owner of the firm changed its name to Global Brokerage Inc., effective January 27, 2017.
A Managing Director of Leucadia National Corp, which before the bankruptcy held a 49.9% equity stake in the operating company, was appointed chairman of the FXCM Group board. Its U.S. accounts were sold to Gain Capital. About 40,000 customer accounts were sold at about $375 each.
Forex Capital Markets was founded in 1999 in New York, and was one of the early developers of online forex trading. Initially, the firm was called Shalish Capital Markets, but after one year, rebranded as FXCM. In January 2003, FXCM entered into a partnership with Refco group, one of the largest US futures brokers at the time. Refco took a 35% stake in FXCM and licensed the FXCM software for use by its own clients. Refco filed for bankruptcy on October 17, 2005, a week after a $430 million fraud was discovered, and two months after its initial public offering of stock. Refco's CEO Phillip R. Bennett was later convicted of the fraud. FXCM became entrenched in the Refco bankruptcy proceedings for several years.
By 2005 the online retail forex market began to grow, though it was commonly considered a risky market, full of fraud and speculation.
The "dealing desk" or market-maker system of trading with customers created distrust for retail forex traders. Customers could only trade directly with their brokers who took the opposite side of the trade. Whenever the customer profited, the broker would lose money, creating a conflict of interest. In 2007 FXCM began using the "no dealing desk" system of trading, claiming that all customer trades were made with independent market-makers and that there would be no conflict of interest between FXCM and their customers.
In 2008, the self-regulatory organization for the US futures industry, the National Futures Association (NFA), obtained permission from the Commodity Futures Trading Commission (CFTC) to increase the minimum capital requirements, in staged increments, to $20 million for "Forex Dealer Members" including FXCM. The increase was in response to the failures of some forex brokers, and it allowed FXCM to acquire new business from some of its smaller competitors who either ceased all operations or moved out of the US.
Initial public offering
In December 2010, FXCM went public and began trading on the NYSE, becoming the first forex broker in the US to issue stock to the public. The initial public offering price was $14.00 per share.
In its IPO prospectus, FXCM described its no dealing desk trade execution.
When our customer executes a trade on the best price quotation offered by our FX market makers, we act as a credit intermediary, or riskless principal, simultaneously entering into offsetting trades with both the customer and the FX market maker. We earn fees by adding a markup to the price provided by the FX market makers and generate our trading revenues based on the volume of transactions, not trading profits or losses.
The following year, in February and March 2011, several class actions lawsuits were filed against FXCM, alleging fraud and racketeering from deceptive and unfair trade practices, and misleading shareholders during the 2010 IPO.
In August 2011, the NFA fined FXCM $2 million for slippage malpractices. FXCM also settled with the CFTC for $6 million for failure to pay positive slippage to customers. FXCM also paid clients restitution of about $8 million.
On October 25, 2011, three debtors, Certified, Inc., Global Bullion Trading Group, Inc., and WJS Funding, Inc., filed an adversary complaint in the United States Bankruptcy Court for the Southern District of Florida against Forex Capital Markets LLC, ODL Securities, Inc., and ODL Securities, Ltd. (“Defendants”). The complaint asserts claims under the Federal Bankruptcy Code to recover allegedly preferential and fraudulent transfers to the Defendants, under the Racketeer Influenced and Corrupt Organizations Act (“RICO”), 18 U.S.C §1961 et seq., as well as the common law. The complaint seeks an unspecified amount of compensatory and punitive damages, interests, and costs.
In June 2012 FXCM bought a controlling stake in Lucid Markets LLP, a London-based automated trading group focused on currency trading. Lucid is currently for sale.
From 2005-January 2017, FXCM faced a total of 13 CFTC reparations cases, 17 NFA arbitration decisions, and 8 other regulatory actions in the U.S.
In February 2014 the UK Financial Conduct Authority (FCA) fined Forex Capital Markets Ltd and FXCM Securities Ltd (“FXCM UK”) £4,000,000 for slippage violations and for failing to inform the FCA of the CFTC investigation of the same practices. About £6 million ($10 million) was also paid in restitution to FXCM UK’s clients.
Swiss franc jump
On January 15, 2015 following a large increase in the price of Swiss francs, the company lost $225 million and was in breach of regulatory capital requirements. The next day FXCM secured a $300 million loan with a 10% coupon from Leucadia National Corp in order to meet its capital requirements. Further terms of the loan were later released, showing that the coupon rate might rise to 17% or higher and other limitations were imposed. Citigroup analysts quoted by Bloomberg said that the terms of the loan “essentially wiped out” the value of FXCM’s stock.
Loss of US license
FXCM promised its customers a "no dealing desk" trading system, taking prices from a number of major banks and market makers. This system allowed clients to trade the best price at any given time. This is also known as a direct market access (DMA) system, in contrast to a market maker system more commonly used by forex brokers. In a "dealing desk" or market marker system, FXCM would be the counterparty to every trade and would profit only when its customers lost money, and would lose money whenever its customers profited. In a "no dealing desk" system FXCM would act simply as a broker, getting a commission on every trade, while the banks and market makers took the risk on the trades and FXCM avoided a conflict of interest.
On February 6, 2017, the CFTC imposed a penalty of $7 million on FXCM for defrauding its retail customers. The Commission found that a closely related company was acting as the main market maker for its trades, and that FXCM lied to its customers about the market maker. FXCM received $77 million in "rebates" from the market maker.
The Commission prohibited the company from registering with CFTC, effectively banning it from the US commodity brokerage industry. The same day, NFA barred FXCM from its membership. The company reacted by selling its US customer base to a rival forex broker Gain Capital Holdings Inc.
On February 13, 2017 FXCM agreed to pay another fine of $650,000 to the CFTC to settle charges that FXCM was undercapitalized by $200 million in January 2015.
As of March 4, 2017 the firm was not accepting customers from many countries, including Hong Kong, Japan, the Russian Federation, Singapore, Turkey, Ukraine, the United States, and the US Virgin Islands. On March 30, 2017 Forex Capital Markets LLC ceased representing FXCM Australia.
On April 27, 2017 Leucadia National Corp. reported to the US Securities and Exchange Commission that they had marked down the value of their equity investment in FXCM by $130 million. They report cumulative gains on their original investment of about $300 million and that they "have nearly recovered the full amount of cash we invested." They are still owed $123 million in debt and value their equity position at $187 million.
The value of publicly held shares of Global Brokerage fell below $15 million (about $2.60 per share) for 30 consecutive days on May 2, 2017, prompting NASDAQ to warn Global Brokerage that the shares could be delisted as early as October 31, 2017. Delisting would trigger default on FXCM's convertible notes, which might then trigger default on the debt it owes to Leucadia.
In its first quarter 10Q report to the SEC, Global Brokerage, Inc. stated that "we believe that the potential delisting raises substantial doubt about our ability to continue as a going concern as at May 15, 2017."
Four class action suits against Global Brokerage by shareholders were consolidated in the U.S. District Court for the Southern District of New York in May 2017.
On June 6, 2017 Effex Capital, the closely related company indicated in the complaint filed in February, filed a libel case against NFA. Lawsuit claims that the NFA falsely accused Effex of co-operating with FXCM to the detriment of their customers.
The Convertible Notes mature on June 15, 2018. At that time, we will be obligated to repay the aggregate principal amount of the Convertible Notes. We may not have enough available cash or be able to obtain financing at that time to meet our repayment obligations
Prior to the bankruptcy in the US, the parent company, Global Brokerage Inc (formerly called FXCM Inc.) was publicly traded on the New York Stock Exchange until early 2017, and then on NASDAQ until its delisting in December 2017, soon after it announced its bankruptcy filing. Global Brokerage owned a 74.5% interest in Global Brokerage Holdings, which owned 50.1% of FXCM. Leucadia National Corp owned the other 49.9%, plus debt worth $123 million as of March 31, 2017. FXCM owned all the operating companies including FXCM UK. Leucadia did not own any shares in Global Brokerage.
Ken Grossman was CEO of Global Brokerage. Drew Niv, who had earlier resigned the position, was interim Chief Executive Officer of Global Brokerage until about May 15, 2017. Grossman had an unusual contract to pay him $600,000 in base salary plus a bonus of $1,000,000 if he stayed in the position for a full year, but with his tenure to terminate in one year.
At FXCM Group Brendan Callan was the CEO and Jimmy Hallac of Leucadia was Chairman of the Board. COO David Sakhai receives base compensation of $600,000 per year plus a $1,000,000 bonus. Eduard Yusupov, the head dealer, received $600,000 in base pay. Global Brokerage, Inc. had a market capitalization of about $12 million in May 2017. Cash generated by FXCM was first applied to pay off the debt owned by Leucadia, which had the right to force a sale of FXCM in January 2018 if the debt was not paid.
At least three sets of lawsuits were filed against the parent firm, Global Brokerage, Inc. Shareholders contend that they were misled by the company's initial public offering prospectus or otherwise defrauded by management. Former customers contend that they were defrauded by the claim that they were trading on a "no dealing desk" system. In the UK Daniela Shurbanova filed a suit claiming that trades that resulted in $460,000 in profits for her were simply cancelled. FXCM said that the trades were cancelled because the prices they quoted were changed more slowly than actual market prices, and that Shurbanova was trading to take advantage of the price discrepancies.
FXCM reported negative earnings of $28.2 million for the quarter ending March 1, 2017 and held $141.7 million in cash. They owed $121 million to Leucadia. Global Brokerage owed another $163 million to convertible note holders.
The market capitalization of Global Brokerage, Inc. (known as FXCM, Inc. until 2017) fell by 90% in 2015 and an additional 58% in 2016. On February 7, 2017 it fell by another 50% with the stock price ending at $3.45. The share price continued to drop to $2.00 on May 25, 2017 with a market capitalization of about $12 million. Before Global Brokerage declared their intention to seek bankruptcy protection in November, 2017, its shares were trading at about $1.30, and then fell another 27% to $0.95 by November 22. On July 25, 2018 Global Brokerage shares traded at $0.07, giving the company a market capitalization of less than $600,000.
The prepackaged bankruptcy was scheduled to be officially closed on June 14, 2018, but proceedings continued until about August 1. Noteholders were expected to be issued new securities as previously agreed. Provisions releasing managers and directors of the company from liability in civil suits are not expected to be adopted.
Critics of the industry state that few retail traders have the experience to make money trading forex. In 2005, Drew Niv, then chief executive of FXCM, said: "If 15% of day traders are profitable I'd be surprised." The New York Times quoted Marc Prosser, then Chief Marketing Officer at FXCM saying "Don't just call it investing - this is speculation, and people should only be putting up risk capital they can afford to lose."
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