FXCM and founders fined USD7m over forex fraud


Forex Capital Markets (FXCM), its parent company FXCM Holdings and FXCM’s founding partners, Dror Niv and William Ahdout, are to pay a USD7 million penalty to settle CFTC charges that they defrauded retail forex customers.

In addition, FXCM, Niv, and Ahdout are prohibited from registering with the CFTC, acting in exempt capacities or acting as principals, agents, officers or employees of registrants.
 
The CFTC finds that, between 4 September 2009 though at least 2014, FXCM engaged in false and misleading solicitations of FXCM’s retail foreign exchange (forex) customers by concealing its relationship with its most important market maker and by misrepresenting that its “No Dealing Desk” platform had no conflicts of interest with its customers. The order finds FXCM, FXCM Holdings and Niv responsible for FXCM making false statements to the National Futures Association (NFA) about its relationship with the market maker.
 
The order requires the respondents jointly and severally to pay a USD7 million civil monetary penalty and to cease and desist from further violations of the Commodity Exchange Act and CFTC Regulations.
 
FXCM, Niv, and Ahdout agree to withdraw from CFTC registration; never to seek to register with the CFTC; and never to act in any capacity requiring registration or exemption from registration, or act as a principal, agent, officer, or employee of any person that is registered, required to be registered, or exempted from registration with the CFTC.
 
“Full and truthful disclosure to customers and honest discourse with self-regulatory organizations such as NFA are vital to the integrity and oversight of our markets,” says Gretchen L Lowe, principal deputy director and chief counsel of the CFTC’s Division of Enforcement. “Today’s action’s demonstrates that the CFTC is committed to protecting customers from harm in the markets it regulates.”
 
FXCM is registered with the CFTC as a Futures Commission Merchant and Retail Foreign Exchange Dealer. FXCM has been providing retail customers with access to over-the-counter forex markets through a proprietary technology platform and has acted as counterparty in transactions with its retail customers in which customers can buy one currency and simultaneously sell another. Both Niv and Ahdout were CFTC registrants during the relevant period.
 
FXCM, under Niv’s and Ahdout’s direction and control, misrepresented to its retail forex customers that when they traded forex on FXCM’s No Dealing Desk platform, FXCM would have no conflict of interest, the Order finds. In addition, according to FXCM’s marketing campaign, retail customers’ profits or losses would have no impact on FXCM’s bottom line, because FXCM’s role in the customers’ trades was merely that of a credit intermediary, the order finds. FXCM further represented that the risk would be borne by banks and other independent “market makers” that provided liquidity to the platform, according to the order.
 
Contrary to these representations, FXCM had an undisclosed interest in the market maker that consistently “won” the largest share of FXCM’s trading volume – and thus was taking positions opposite FXCM’s retail customers. FXCM formulated a plan in 2009 to create an algorithmic trading system, using an FXCM computer programme that could make markets to FXCM’s customers, and thereby either replace or compete with the independent market makers on FXCM’s “No Dealing Desk” platform. Although FXCM eventually spun off the algorithmic trading system as a new company, in actuality the company remained closely aligned with FXCM, according to the order. This market maker received special trading privileges, benefitted from a no-interest loan provided by FXCM, worked out of FXCM’s offices, and used FXCM employees to conduct its business.
 
The order finds that FXCM and the market maker agreed that the market maker would rebate to FXCM approximately 70 per cent of its revenue from trading on FXCM’s retail forex platform. In total, through monthly payments from 2010 through 2014, the company rebated to FXCM approximately USD77 million of the revenue it achieved. However, FXCM did not disclose to customers, among other things, that this company – FXCM’s principal market maker – was a start-up firm spun off from FXCM.
 
The order also finds that FXCM wilfully made false statements to NFA in order to conceal FXCM’s role in the creation of its principal market maker as well as the fact that the market maker’s owner had been an FXCM employee and managing director. The order finds that during a meeting between NFA compliance staff and FXCM executives, Niv omitted to mention to NFA the details of FXCM’s relationship with the market maker.
 
The order holds Niv and Ahdout liable for FXCM’s fraud violations as “controlling persons” who were responsible, directly or indirectly, for FXCM’s violations. Niv is also held liable for FXCM’s false statements to NFA as a controlling person who was responsible directly or indirectly for those violations. FXCM Holdings is held liable for FXCM’s fraud and false statement violations as principal of FXCM.

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