On September 1, 2016, Saxena White filed a Verified Third Amended Shareholder Derivative Complaint on behalf of Brett Kandell in the Court of Chancery of the State of Delaware on behalf of nominal defendant FXCM Inc. (“FXCM” or the “Company”) (NASDAQ:GLBR). The Complaint charges the directors and officers of FXCM with breach of fiduciary duty, waste of corporate assets and unjust enrichment.
The Complaint accuses FXCM’s directors and executives of harming the Company by adopting, implementing, and condoning a business strategy based on the violation of Commodity Futures Trading Commission (“CFTC”) Regulation 5.16, which prohibits foreign exchange trading firms like FXCM from representing in any way that they are guaranteeing their customers against losses from trading activity. As a foreign exchange trading firm which extended leverage at ratios of 50:1 for U.S. customers and 200:1 for overseas customers, FXCM was especially susceptible to the risk of massive losses from extreme market volatility. But FXCM’s board of directors ignored Regulation 5.16 and instead promoted in marketing and customer agreements its zero debit guarantee: that customers would never owe debit balances to FXCM and that the maximum risk of loss was limited by the amount in their account. This guarantee allowed FXCM to grow its customer base and its commissions, while at the same time increasing the Company’s risks.
When the Swiss National Bank announced on January 15, 2015 that it was unpegging the Swiss franc from the euro, extreme market volatility caused FXCM customers to incur $276 million in losses. When FXCM’s regulators notified FXCM that it had breached its capital requirements, the Company was forced to seek funding in the form of a $300 million loan with Leucadia National Corporation (“Leucadia”) with extremely onerous terms, including an interest rate topping out at 20.5% and a schedule of economic value-sharing that disproportionately favors Leucadia. One Wall Street analyst observed that the deal “essentially wiped out” the value of FXCM’s stock. Ultimately, on August 16, 2016, the CFTC filed a complaint against FXCM for, inter alia, improperly guaranteeing its customers against loss.
On October 17, 2016, Defendants filed their Motion to Dismiss the Third Amended Complaint. A hearing on Defendants’ motion was held on February 1, 2017.
On September 29, 2017, Saxena White secured a major victory with an important decision issued by the Delaware Court of Chancery in Kandell v. Niv et al., C.A. No. 11812-VCG. In a 54-page opinion, Vice Chancellor Sam Glasscock III denied defendants’ motion to dismiss with respect to the three most significant counts of the plaintiff’s complaint.
The litigation took a dramatic turn on December 11, 2017, when the Company’s parent, Global Brokerage, Inc., filed a prepackaged plan for reorganization under Chapter 11 of the United States Bankruptcy Code. Bankruptcy proceedings often extinguish derivative actions, and the initial plan of reorganization in this case contained a provision that called for the release of any derivative claims asserted or assertable on behalf of the Company.
Recognizing that the derivative claims in this case were an extremely valuable asset for FXCM, as any funds recovered in the litigation would be paid directly to the cash-strapped company, on January 12, 2018, Plaintiff filed an objection to the plan of reorganization. Plaintiff’s counsel negotiated extensively with FXCM’s bankruptcy counsel to ensure that the derivative claims were carved out of any language in the plan which would have released claims on behalf of the Company. On January 22, 2018, the bankruptcy court entered a Confirmation Order that finalized the plan of reorganization and, significantly, preserved all of Plaintiff’s derivative claims.