February 08, 2019
by Katherine Cooper

On February 1, 2019, a Manhattan federal court judge tossed out a consolidated class action against Effex Capital, LLC (“Effex”) and John Dittami (“Dittami”) on the grounds that the plaintiffs’ allegations of wrongdoing “were lifted nearly verbatim from [a] CFTC settlement” to which Effex and Dittami were not parties.  Judge Paul Crotty reasoned that although the facts recited in the CFTC settlement could, at the pleading stage, support allegations made “upon information and belief,” that, without more, such allegations did not satisfy the pleading requirements of Federal Rule of Civil Procedure 9(b) to plead fraud with particularity.

In the case, Nguyen v. FXCM Inc.,[1] the plaintiffs, two classes of customers of a forex dealer – FXCM Inc., Forex Capital Markets, LLC, and FXCM Holdings LLC (collectively, “FXCM”) – alleged that FXCM and its principals deceived them by promoting FXCM’s “no dealing desk” execution model.  The complaint alleges that FXCM represented that it would execute its customers’ orders solely on an agency basis.  Instead, plaintiffs allege FXCM routed a substantial portion of its customers’ orders to Effex which executed those orders on a principal basis, and in which FXCM had an undisclosed ownership interest.  In addition, plaintiffs allege that Effex’s head trader, Dittami, worked out of FXCM’s office and used FXCM’s email system and servers to run Effex.  The CFTC[2] and NFA[3] brought actions against FXCM and its principals (but not Effex or Dittami) for this conduct and FXCM settled with the CFTC and the NFA by paying a $ 7 million penalty and permanently withdrawing from doing business in the United States.

In Nguyen, the court stayed the case against FXCM and its principals based on the arbitration agreement included in FXCM’s customer account agreements.  Vis-à-vis Effex and Dittami, however, the court allowed the case to move forward as these defendants were not named parties in the arbitration clause.  The plaintiffs alleged that Effex and Dittami had aided and abetted FXCM and its principals’ violation of Section 4b(a)(2)(A) of the Commodity Exchange Act (“CEA”)[4] which makes it unlawful “for any person, in or in connection with any order to make, or the making of, any contract of sale of any commodity for future delivery . . . to cheat  or defraud or attempt to cheat or defraud the other person.”  In addition, the plaintiffs alleged that Effex and Dittami were liable under CEA Section 2(a)(1)(B)[5] on a principal/agent theory.

Effex and Dittami moved to dismiss the class action under Federal Rules of Civil Procedure 9(b) (failure to plead fraud with particularity) and 12(b)(6) (failure to state a claim).  As described above, Judge Crotty granted the motion finding that the plaintiffs’ complete reliance on facts recited in the CFTC order against FXCM and its principals failed to plead fraud with the requisite particularity required by Rule 9(b). 

In addition, Judge Crotty granted Effex’s and Dittami’s motion to dismiss for failing to state a claim.  The judge noted that under CEA Section 22(a),[6] a person only has a private right of action for violations of the CEA if the person suffered “actual damages.”  The plaintiffs alleged that, had they known about the relationship between FXCM and Effex, they would not have placed orders with FXCM, and that their orders were subject “to inferior executions through deliberate abuses, all to the financial detriment and harm of Plaintiffs.”[7]  Judge Crotty found these damages claims to be too generalized and hypothetical to establish the requisite allegation of “actual damages”:

Presumably, Plaintiffs know the orders they placed, and whether those orders were filled at the same, better, or worse price than the initial price quotation.  Yet Plaintiffs here provide no accounting of actual losses suffered or analyses of potential damages based on assessments of orders actually placed.[8]

Concluding that the plaintiffs had not pled that they suffered “actual damages,” Judge Crotty granted Effex’s and Dittami’s motion to dismiss both the aiding and abetting and principal/agent liability claims for failing to state a claim.

 

[1] Slip op., Dkt. No. 1:17-cv-2729-PAC-HBP (S.D.N.Y. Feb. 1, 2019) (“Decision”).

[2] In re Forex Capital Markets, LLC, FXCM Holdings, LLC, Dror Niv and William Ahdout, CFTC Docket No. 17-09 (CFTC Feb. 6, 2017) available at: https://www.cftc.gov/sites/default/files/idc/groups/public/@lrenforcementactions/documents/legalpleading/enfforexcapitalorder020617.pdf

[3] In re Forex Capital Markets LLC, William Ahdout, Dro Niv and Ornit Miriam Niv, NFA 17BCC00001 (NFA Feb. 6, 2017) available at: https://www.nfa.futures.org/BasicNet/Case.aspx?entityid=0308179&case=17BCC00001&contrib=NFA

[4] 7 U.S.C. § 6b(a)(2)(A).

[5] 7 U.S.C. § 2(a)(1)(B).

[6] 7 U.S.C. § 25.

[7] Decision at 15.

[8] Id. at 16.

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