The CFTC filed its complaint on February 10, alleging Florida-based Gibraltar made false promises of large profits, misrepresented its expertise and downplayed the risks inherent in trading FX options. FXCM was charged with liability for the acts of Gibraltar, which acted as an introducing agent for FXCM.
Niv said it was unreasonable of the CFTC to cite FXCM in the case when Gibraltar was trading on behalf of clients who had given Gibraltar power of attorney to do so. He added that FXCM terminated its relationship with Gibraltar in January 2003, after clients introduced to FXCM by the firm made complaints.
Niv disputed the CFTC’s calculation that FXCM made at least $200,000 in commissions from clients introduced to them by Gibraltar. He said FXCM does not charge commissions but makes its profits from the spread it offers. The CFTC accounted for a $50 per round charge when calculating this fee.
Joan Manley, deputy director of CFTC division of enforcement in Washington, said the CFTC does not believe there was any intent on the part of FXCM, but said the firm is responsible for the actions of its agents. If Gibraltar had maintained relationships with several futures commission merchants, then no charges would have been brought, but the exclusive nature of the relationship increases the "duty to monitor", she said.
As a result, the CFTC is seeking the repayment of all fees from trades executed by FXCM for clients introduced to them by Gibraltar. Manley said the commission would not seek to suspend FXCM as this would require evidence of "egregious systemic conduct", which is not apparent.
The case highlights the confusion surrounding the regulation of retail forex trading in the US, which was brought within the jurisdiction of the CFTC with the December 2000 Commodity Futures Modernization Act.
The Act required firms wishing to trade foreign exchange with retail counterparties to register with the National Futures Association as a futures commission merchant. But, said Niv, the CFTC did not provide guidelines for FCMs based on these laws until December 2003 - 11 months after Gibraltar stopped acting as an introducing agent for FXCM.
FXCM - one of the leading retail FX trading firms in the US, trading $64 billion in notional value during January - is not the only firm to have fallen foul of this confusion.
In April 2003, a US judge dismissed a lawsuit filed against Gain Capital - another leading US trading firm, trading $35 billion in FX in January - ruling that it was without grounding.
Investors with Washington-based money manager Sterling Forex had filed the suit in New York, claiming that Sterling and Gain had covered up clients’ losses. But Gain’s sole affiliation with Sterling was as a clearing firm for its foreign currency transactions, Gain said.