The Second Circuit US Court of Appeals today rejected a plea to revive the black swan lawsuit related to FXCM Inc. The court noted that the company and Drew Niv’s representations in the business model is merely a “fraud by hindsight.”
What happened to the FXCM case?
A New York Southern District Court dismissed a complaint against FXCM Inc. and Drew Niv related to events from January 15, 2015. The plaintiffs in the case challenged the ruling by the court and moved to the Court of Appeals.
However, the judgment mandate issued by the appeals court contains a Summary Order which upheld the judgment of the New York district court. It suggested that the so-called black swan case against FXCM, now known as Global Brokerage Inc., and its former head will not be revived.
Why were the plaintiffs appealing?
The plaintiff in the case is the Retirement Board of the Policemen’s Annuity and Benefit Fund of Chicago on behalf of the Policemen’s Annuity and Benefit Fund of Chicago. The institutional investor purchased the common stock of FXCM on March 17, 2014, and continued buying till January 20, 2015. The Board brought the putative class action on behalf of everyone who acquired the FXCM stock or purchased it during the Class Period, who was subsequently damaged.
The plaintiff alleged that Niv and FXCM misled the investors regarding the risk associated with their business. They referred specifically to the agency model of the company, its leverage policies and the significant losses the company could be exposed to if Euro was de-pegged from the Swiss Franc. Both the district court and appeals court did not find strong ground for the allegations to hold true.
In the summary order, the appeals court stated that it agrees with the district court that the plaintiff has not alleged facts. The court further noted that the plaintiff had not made any argument about the motive to defraud the investors. It said that the plaintiffs are focusing on how Niv falsely described the risks associated with the company’s businesses and the risks associated with holding a large position in the Euro/Swiss Franc currency pair.
The plaintiff was relying on analysts’ statements made when the EUR/CHF pair depegged. Market participants were in shock with the move and commented on FXCM’s large positions as well. The court argued that such allegations do not have any strong circumstantial evidence that provides reckless or conscious conduct by the defendants to defraud investors. It also referred to a point made by the defendants that the EUR/CHF de-pegging was a black swan event.