International Union of Operating Engineers Local No. 478 Pension Fund v. FXCM Inc. et al

Filing 73

Opinion and Order re: 53 MOTION to Dismiss Amended and Consolidated Complaint filed by Robert Lande, FXCM Inc., Dror Niv, 56 LETTER MOTION for Oral Argument addressed to Judge Kimba M. Wood from Paul R. Bessette dated Februa ry 25, 2016. For the foregoing reasons, Defendants' Motion to Dismiss is GRANTED. Plaintiff is given thirty days to file an amended complaint, should it choose to do so. This Opinion resolves docket numbers 53 and 56. (As further set forth in this Order.) (Signed by Judge Gregory H. Woods on 8/18/2016) (kko)

UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
-------------------------------------------------------X
RETIREMENT BOARD OF THE
POLICEMEN’S ANNUITY AND BENEFIT
FUND OF CHICAGO ON BEHALF OF THE
POLICEMEN’S ANNUITY AND BENEFIT
FUND OF CHICAGO, Individually and on
Behalf of All Others Similarly Situated,
Plaintiff,

15-CV-3599 (KMW)
Opinion and Order

-againstFXCM INC., DROR NIV, and
ROBERT LANDE,
Defendants.
-------------------------------------------------------X
KIMBA M. WOOD, United States District Judge:
Plaintiff, Retirement Board of the Policemen’s Annuity and Benefit Fund of Chicago, on
Behalf of the Policemen’s Annuity and Benefit Fund of Chicago, brings this putative class action
against FXCM, Dror Niv, and Robert Lande (collectively “Defendants”).
Plaintiff asserts claims under Sections 10(b) and 20(a) of the Securities Exchange Act of
1934 (the “Exchange Act”). (Compl. ¶¶ 1, 128-140 [Doc. No. 50]). Plaintiff alleges that
Defendants made materially false or misleading statements relating to FXCM’s business model
and risk management practices, and that these statements misled investors about the risky nature
of FXCM’s business, causing hundreds of millions of dollars in losses to class members.
At its heart, this case is about FXCM’s significant losses during an unpredictable market
event. In 2011, the Swiss National Bank (“SNB”) pegged the Swiss Franc to the Euro at 1.2:1,
meaning that 1 Euro would be worth at least 1.2 Swiss Francs. Id. ¶ 11. On January 15, 2015, to
1

investors’ great surprise, the SNB suddenly removed this peg; prices and liquidity changed
rapidly as the value of the Swiss Franc rose in relation to the Euro. Id. ¶¶ 6-7. As a result of this
abrupt change in the SNB’s policy, FXCM lost $275 million. Id. ¶ 36. Plaintiff attributes
FXCM’s loss to its allegedly risky business model and lack of a risk management department.
Plaintiff alleges that Defendants’ statements regarding the riskless nature of FXCM’s business
model and its risk management controls were materially false or misleading.
Defendants have moved to dismiss the Complaint [Doc. No. 50] pursuant to the Private
Securities Litigation Reform Act, 15 U.S.C. § 78u–4, and the Federal Rules of Civil Procedure
8(a), 9(b), and 12(b)(6). Defendants attribute FXCM’s large loss to the SNB’s surprise decision,
market dysfunction, and lack of liquidity. Although Plaintiff argues that this case is unrelated to
the “timing” of the SNB’s actions, Plaintiff’s allegations suggest otherwise. As set forth below,
because Plaintiff failed to plead scienter with the requisite specificity, Defendants’ Motion is
GRANTED in its entirety. Plaintiff is granted leave to re-plead its Complaint within thirty days
of this decision.
I.

BACKGROUND
A. The Parties
Plaintiff is an institutional investor that purchased FXCM common stock between June

11, 2013 and January 20, 2015, inclusive (the “Class Period”). (Compl. ¶¶ 1, 17). Plaintiff
brings this putative class action on behalf of all those who purchased or otherwise acquired
FXCM stock during the Class Period and were damaged thereby. Id. ¶ 115.
Defendant FXCM was one of the first currency brokerage firms to serve retail customers,
and during the Class Period it was one of the largest retail foreign exchange (“FX”) firms in the
world. Id. ¶¶18, 23. FXCM provides customers with trading and related services on its

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sophisticated on-line technology platform. Id. ¶ 24. Using its proprietary technology platform,
FXCM facilitates billions of dollars of FX trades. Id. ¶ 2. The company is headquartered in
New York, NY, and its stock is traded on the New York Stock Exchange under the symbol
“FXCM.” Id. ¶18. FXCM is structured as a holding company for operating subsidiaries in New
York, the United Kingdom, Hong Kong, and other locations.1 Id. ¶ 18.
Defendant Dror Niv is one of the founders of FXCM, and was CEO and Chairman of the
Board of Directors during the Class Period. Id. ¶ 19. Defendant Robert Lande is also one of the
founders of FXCM, and was the company’s CFO during the Class Period. Id. ¶ 20.
B. The FX Market and FXCM’s Business Model
Participants in the FX market make bets on price fluctuations of various currency pairs,
for example the Dollar versus the Euro or the Euro versus the Swiss Franc (“EUR/CHF”). See
id. ¶ 25. When a trader buys one currency, or trades “long,” s/he simultaneously sells another.
Id. FXCM allowed customers to trade 59 currency pairs. Id. ¶¶ 24, 25.
Most retail brokers earn revenue on FX trades by taking the opposite sides of their
customers’ trades, thereby profiting when their customers suffer losses and suffering losses when
their customers profit. Id. ¶ 27. FXCM, in contrast, used what it called an “agency model” for
its operations. Id. When a customer wanted to trade a certain currency pair, FXCM would
collect the best prices quoted by twelve to sixteen banks and financial institutions that served as
liquidity providers—market makers for the trades placed by FXCM’s customers. Id. After the
customer placed her/his trade with FXCM, FXCM would then serve as an intermediary by
contracting with the liquidity provider on behalf of the customer. Id.; see also (Pl.’s Opp’n to
Defs.’ Mot. to Dismiss (“Pl.’s Opp’n”) at 1, 7 [Doc. No. 59]). FXCM made money through

FXCM’s operating subsidiaries are subject to the regulatory requirements of the countries in which they
operate. (Compl. ¶¶ 18 [Doc. No. 50]).
1

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commissions on trades, usually at a rate of $90 per million dollars traded. (Compl. ¶¶ 27-28).
Thus, when the volume of customers’ trades increased, so too did FXCM’s revenues. Id. ¶ 28.
C. Leverage and the No Debit Policy
In order to encourage trades, FXCM, like other brokers, allowed customers to trade with
leverage, which essentially allows a customer to pay less than the full price for a trade. Id. ¶¶
26-29. Customers could deposit money into their FXCM accounts, which served as their margin
collateral, and trade on the FX market with amounts much larger than their actual account
balances. See id. In the United States, the Commodities Futures Trade Commission permitted
currency trading with leverage of up to 50:1, allowing a customer with only $100 of margin
collateral to trade with $5,000. Id. ¶ 26. In Europe, FXCM’s “default” leverage ratio was 100:1,
and in Australia FXCM permitted customers to trade with leverage as high as 500:1. Id. If a
customer were trading at 500:1 leverage, an adverse currency price change of .002% would wipe
out a customer’s entire margin collateral. Id.
In addition, FXCM attracted traders to its business by implementing a “no debit” policy.
Id. ¶ 59. Under this policy, if a customer made a profitable trade, the customer would keep all of
the profits, including the portion earned with the leveraged money. Id. ¶ 27. However, if a
customer made a losing trade, the customer would not be responsible for anything beyond what
was in her/his margin collateral account. Id. Instead, FXCM was responsible for recouping any
negative account balances that accrued as a result of customers’ losing leveraged trades.2 Id.
Therefore, a customer’s risk was limited to the margin collateral in her/his account. Id.

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For example, if a customer had $100 of margin collateral in her/his account and was trading using 50:1
leverage, s/he could trade with $5,000. If the customer’s trade position fell by 3% or $150, s/he would have a
negative account balance because the $150 loss would be greater than the $100 margin collateral. According to
FXCM’s agency model, FXCM would be responsible to the liquidity provider for the $50 difference.

4

To protect against negative account balances, FXCM would close out a customer’s
position if changes in currency prices exhausted that customer’s margin collateral. Id. ¶ 30.
FXCM depended on its technology systems to constantly monitor currency prices and update the
values of its customers’ accounts. Id. FXCM monitored customers’ accounts three times per
second and automatically closed out a position if a customer’s account was at risk of going
negative due to a losing trade. Id. ¶¶ 30, 76. When the SNB decided to remove the Swiss Franc
peg, however, a lack of liquidity and rapid price changes prevented FXCM from closing out
customers’ positions before they became negative. Id. ¶ 30.
D. The SNB’s Decisions
On September 6, 2011, the Swiss National Bank announced that it was temporarily
pegging the value of the Swiss Franc to the Euro at a rate of 1.20 Swiss Francs to 1 Euro, id. ¶¶
11, 40, i.e., the SNB would purchase Euros in order to ensure that 1.20 Swiss Francs were worth
1 Euro. Id. ¶¶ 11, 37, 40. The SNB would allow the Euro’s value to increase against the Swiss
Franc (for example, a rate of 1.25 Swiss Francs to 1 Euro would be permissible), but the SNB
would not permit the value of the Swiss Franc to drop below 1.20 relative to the Euro. Id. ¶¶ 4849. The decision to peg the Swiss Franc precipitated the largest and fastest change in currency
price among G-10 currencies in recent decades. Id. ¶ 11, 40. On the day of announcement, the
price of the Swiss Franc changed more than 8% within minutes of the SNB’s decision. Id.
While the value of the Swiss Franc remained pegged at 1.20 relative to the Euro, FXCM
recommended that customers bet on the Euro versus the Swiss Franc, with a stop-loss order at
1.2:1. Id. ¶¶ 5, 48-49. This meant that if the Euro increased in value, the customer would profit.
Id. If for any reason the value of the Swiss Franc rose, customers could protect themselves by
exiting the positions with their stop-loss trade orders. Id. Plaintiff alleges that by September

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2014, FXCM customers held a collective $1 billion position on the Euro-Swiss Franc currency
pair. Id. ¶¶ 5, 49; (Pl.’s Opp’n at 10).
On January 15, 2015, the SNB surprisingly announced that it was de-pegging its currency
from the Euro and allowing the Swiss Franc to move to its actual market value. (Compl. ¶¶ 6,
31, 32). Within minutes, the price of the Swiss Franc soared by as much as 40% versus the Euro.
Id. ¶¶ 6, 92. Because of the volatility and extreme EUR/CHF price changes, the liquidity
providers on which FXCM relied stopped providing prices and liquidity for the EUR/CHF
currency pair. Id. ¶¶ 6-7. As a result, FXCM could not close out its customers’ accounts before
their margin collateral was exhausted. Id. ¶¶ 7, 30. By the end of the day, the market price for
the Swiss Franc had risen 14% versus the Euro compared to the previous day. Id. ¶¶ 6, 92.
Ultimately, FXCM sustained losses of $275 million and had breached its regulatory
capital requirements. Id. ¶¶ 36; (Pl.’s Opp’n at 12). In order to avoid getting shut down by
regulators, FXCM had to agree to a punitive financing agreement with Leucadia National
Corporation. (Compl. ¶¶ 8, 34, 94 ). As a result of the losses and the financial agreement with
Leucadia, FXCM’s stock price plummeted by over 90%, from $14.87 on January 14, 2015 to
$1.60 on January 20, 2015. Id. ¶¶ 9, 95.
E. Allegations in the Complaint
Plaintiff alleges that Defendants made a number of materially false or misleading
statements or material omissions during the Class Period, in violation of Section 10(b) of the
Exchange Act and Rule 10b-5 promulgated thereunder. See id. ¶¶ 74-99. In particular, Plaintiff
alleges that Defendants misled investors about the “low risks” of their “agency” business model,
especially in light of FXCM’s leverage policies and enormous risks in relation to the EUR/CHF
currency pair. See id.; Pl.’s Opp’n at 14-21. Further, Plaintiff alleges that Defendants lacked a

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risk management department or protocols to manage their risk. Id.; (Compl. ¶¶ 74-99). Plaintiff
alleges that FXCM’s large losses after the SNB’s decision revealed a risky business strategy
coupled with insufficient risk management procedures, causing hundreds of millions of dollars of
losses to Plaintiff and the class. Id. ¶¶ 13, 122.
II.

LEGAL STANDARD
A. Rule 12(b)(6), Rule 9(b), and the PSLRA Pleading Standard
To survive a motion to dismiss pursuant to Rule 12(b)(6), a complaint governed by Rule

8 of the Federal Rules of Civil Procedure “must contain sufficient factual matter, accepted as
true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “Threadbare recitals of
the elements of a cause of action, supported by mere conclusory statements, do not suffice.”
Iqbal, 556 U.S. at 678. In assessing whether a complaint meets this standard, a court examines
only well-pleaded factual allegations, disregards legal conclusions, and draws all reasonable
inferences in favor of the non-movant. See Allaire Corp. v. Okumus, 433 F.3d 248, 249-50 (2d
Cir. 2006). Ultimately, the court must determine whether the allegations of the complaint
“plausibly give rise to an entitlement to relief.” Iqbal, 556 U.S. at 678.
A complaint that asserts securities fraud, however, must satisfy the heightened pleading
requirements of Federal Rule of Civil Procedure 9(b) and the Private Securities Litigation
Reform Act (“PSLRA”). 15 U.S.C. § 78u–4; see ECA & Local 134 IBEW Joint Pension Tr. v.
J.P. Morgan Chase Co., 553 F.3d 187, 196 (2d Cir. 2009). Rule 9(b) provides that a party
alleging fraud “must state with particularity the circumstances constituting fraud.” The Second
Circuit interprets this rule to require that a complaint: “(1) specify the statements that the
plaintiff contends were fraudulent, (2) identify the speaker, (3) state where and when the

7

statements were made, and (4) explain why the statements were fraudulent.” Rombach v. Chang,
355 F.3d 164, 170 (2d Cir. 2004) (quoting Mills v. Polar Molecular Corp., 12 F.3d 1170, 1175
(2d Cir. 1993)). Although Rule 9(b) permits “[m]alice, intent, knowledge and other conditions
of a person’s mind [to] be alleged generally[,]” a plaintiff is required to “allege facts that give
rise to a strong inference of fraudulent intent.” Acito v. FMCERA Grp., Inc., 47 F.3d 47, 52 (2d
Cir. 1995) (quoting Fed. R. Civ. P. 9(b)).
B. Section 10(b) and Rule 10b-5
Plaintiff’s principal claims are brought under section 10(b) of the Exchange Act. To state
a claim for securities fraud under section 10(b) and Rule 10b-5, plaintiffs must allege: (1) a
material misrepresentation or omission; (2) scienter; (3) connection with the purchase or sale of a
security; (4) reliance; (5) economic loss; and (6) loss causation. Dura Pharms., Inc. v. Broudo,
544 U.S. 336, 341-42 (2005).
III.

DISCUSSION
In this case, the Defendants contest whether the Complaint adequately alleges (1) any

actionable misstatements or omissions; (2) scienter; and (3) loss causation.3 Because Plaintiff
fails to adequately plead scienter, the Court grants Defendants’ Motion to Dismiss.
A. Scienter
The PSLRA requires plaintiffs to “state with particularity facts giving rise to a strong
inference that the defendant acted with the required state of mind.” 15 U.S.C. § 78u–4(b)(2); see
also Tellabs Inc. v. Makor Issues & Rights. Ltd., 551 U.S. 308, 321 (2007) (“The ‘strong

3
Defendants attach to their Motion to Dismiss a litany of press releases, articles, and internal presentations
that the Court does not and cannot rely on at this stage of the litigation. Beautiful Jewellers Private Ltd. v. Tiffany &
Co., No. 06-CV-3085, 2007 WL 867202, at *1 (S.D.N.Y. Mar. 21, 2007) (Wood, J.) (unless the Court converts the
motion to dismiss into a motion for summary judgment, Defendant may not introduce evidence that was neither
incorporated by reference in the Complaint nor properly the subject of judicial notice).

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inference’ standard unequivocally raised the bar for pleading scienter.”) (internal citation and
quotation marks omitted). A court must decide “whether all of the facts alleged, taken
collectively, give rise to a strong inference of scienter, not whether any individual allegation,
scrutinized in isolation, meets that standard.” Id. at 322-23 (emphasis in original). To qualify as
“strong,” the “inference of scienter must be more than merely plausible or reasonable—it must
be cogent and at least as compelling as any opposing inference of nonfraudulent intent.” Tellabs,
551 U.S. at 314; see also Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc.,
531 F.3d 190, 194 (2d Cir. 2008) (“While we normally draw reasonable inferences in the nonmovant’s favor on a motion to dismiss, [the PSLRA] establishes a more stringent rule for
inferences involving scienter.”).
In the Second Circuit, “[t]he requisite scienter can be established by alleging facts to
show either (1) that defendants had the motive and opportunity to commit fraud, or (2) strong
circumstantial evidence of conscious misbehavior or recklessness.” ECA, 553 F.3d at 198.
Motives common to corporate officers, like “the desire for the corporation to appear profitable
and the desire to keep stock prices high to increase officer compensation,” do not suffice to plead
scienter. Id.; Novak, 216 F.3d at 307-08 (plaintiffs must “allege that defendants benefitted in
some concrete and personal way from the purported fraud”). The “motive” showing is often met
by allegations that corporate insiders allegedly engaged in misrepresentations in order to sell
their own shares at a profit. ECA, 553 F.3d at 198 (citing Novak, 216 F.3d at 308). A plaintiff
who cannot show scienter by alleging motive and opportunity can still “raise a strong inference
of scienter under the ‘strong circumstantial evidence’ prong, ‘though the strength of the
circumstantial allegations must be correspondingly greater’ if there is no motive.” Id. at 198-99
(quoting Kalnit v. Eichler, 264 F.3d 131, 142 (2d Cir. 2001)).

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Recklessness is defined as conduct that is, at minimum, “highly unreasonable” and
constitutes “an extreme departure from the standards of ordinary care to the extent that the
danger was either known to the defendant or so obvious that the defendant must have been
aware of it.” S. Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 109 (2d Cir. 2009)
(emphasis in original) (quoting In re Carter-Wallace, Inc. Securities Litigation, 220 F.3d 36, 39
(2d Cir. 2000)); see also Chill v. Gen. Elec. Co., 101 F.3d 263, 269 (2d Cir. 1996) (“An
egregious refusal to see the obvious, or to investigate the doubtful” can give rise to an inference
of recklessness.).
To properly plead recklessness, a plaintiff may either specifically allege that the
defendant had knowledge of facts or access to information contradicting the defendant’s public
statements, or allege that the defendant failed to check information that s/he had a duty to
monitor. Novak, 216 F.3d at 308. “Where plaintiffs contend defendants had access to contrary
facts, they must specifically identify the reports or statements containing this information.” Id.
“An allegation that a defendant merely ought to have known is not sufficient to allege
recklessness.” Kuriakose v. Fed. Home Loan Mortg. Corp., 897 F. Supp. 2d 168, 184 (S.D.N.Y.
2012) (Keenan, J.) (quoting Hart v. Internet Wire, Inc., 145 F. Supp. 2d 360, 368 (S.D.N.Y.
2001) (Pollack, J.)). Allegations of “corporate mismanagement” are too vague to support a claim
under section 10(b). Boca Raton Firefighters & Police Pension Fund v. Bahash, 506 F. App’x
32, 36 (2d Cir. 2012) (quoting Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 477 (1977)).
Courts have refused to accept allegations of “fraud by hindsight” as allegations of
scienter. Novak, 216 F.3d at 309. The Second Circuit has explained that:
Corporate officials need not be clairvoyant; they are only responsible for revealing
those material facts reasonably available to them. See Denny v. Barber, 576 F.2d
465, 470 (2d Cir.1978). Thus, allegations that defendants should have anticipated

10

future events and made certain disclosures earlier than they actually did do not
suffice to make out a claim of securities fraud. See Acito, 47 F.3d at 53.
Id.
Plaintiff’s allegations fail to support a strong inference of scienter based on either (1)
motive and opportunity; or (2) circumstantial evidence of conscious misbehavior or recklessness.
1. Plaintiff Fails to Allege Facts to Support Motive and Opportunity
Plaintiff alleges that motive and opportunity to commit fraud exist because of (a)
Defendants’ stock sales, and (b) FXCM’s stock repurchase program.
a. Stock Sales
First, Plaintiff alleges that Defendant Lande and non-Defendant FXCM employees
engaged in insider trading. Plaintiff alleges that between August 9 and August 13, 2013, Lande
sold 147,500 shares of FXCM for a total profit of $2,610,837. (Compl. ¶¶ 101-103). One month
later, according to Plaintiff, Lande sold another 37,500 shares for a profit of $708,000. Id.
Plaintiff alleges that the only other time Lande sold stock during his tenure at FXCM was in
December 2015, when he sold 68 shares. Id.
Plaintiff also alleges that non-Defendants’ stock trades were suspicious and provide
evidence of scienter. During the Class Period, Eduard Yusupov, a co-founder of FXCM and the
Global Head of Dealing at the company, sold shares worth a total of $1.5 million. Id. ¶¶ 104107. Also during the Class Period, William Ahdout, FXCM’s original co-founder, Director, and
Chief Dealer, sold $14,123,627.64 worth of FXCM shares. Id. ¶¶ 108-112.
b. Stock Repurchase Program
Second, Plaintiff alleges that FXCM’s stock repurchase program also provides evidence
of scienter. In November 2014, because of FXCM’s strong balance sheet and cash in excess of
its regulatory requirements, the Defendants recommended and Board of Directors approved a

11

$50 million increase in the company’s stock repurchase program.4 Id. ¶¶ 113-114. Plaintiff
alleges that Defendants stood to profit from this program because maintaining high share prices
would enable Defendants to cash in their shares at higher prices. Id. However, because of
SNB’s decision, Defendants’ alleged plans were disrupted. Id.
c. Analysis
Taken collectively, Plaintiff’s allegations fail to support a strong inference of scienter
based on motive; even if Plaintiff’s allegations did support such an inference, that inference is
weaker than the non-fraudulent inferences.
Stock sales support allegations of scienter only when those trades are suspicious in timing
or amount. In re Lululemon Sec. Litig., 14 F. Supp. 3d 553, 584-85 (S.D.N.Y. 2014) (Forrest,
J.), aff’d, 604 F. App’x 62 (2d Cir. 2015). “While ‘unusual’ executive stock trading under some
circumstances may give rise to an inference of fraudulent intent, executive stock sales, standing
alone, are insufficient to support a strong inference of fraudulent intent.” In re Bristol-Myers
Squibb Sec. Litig., 312 F. Supp. 2d 549, 561 (S.D.N.Y. 2004) (Preska, J.) (citation omitted).
Indeed, courts have suggested that scienter may not be inferred “strongly” when the alleged
fraud benefited only a single defendant in a corporate entity. Stevelman v. Alias Research Inc.,
174 F.3d 79, 85 (2d Cir. 1999).
Although the profits from the alleged stock sales are considerable, Plaintiff’s allegations
fail because: (1) Defendant Niv—co-founder, CEO, and Chairman of the Board of Directors of
FXCM—never sold a single share; (2) the timing of Lande’s sales were not unusual; (3) nonDefendants’ sales are insufficient for an inference of scienter; and (4) the allegations regarding
FXCM’s stock repurchase program are inadequate to buttress Plaintiff’s allegations of scienter.

4

As a result of the increase, the value of the stock repurchase program rose to $130 million. Id. ¶¶ 113

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First, Plaintiff does not make any meaningful allegations that Niv had a motive to
defraud. Niv did not sell even one of his over 8,000,000 FXCM shares. 5 (Defs.’ Mot. to
Dismiss at 4, 27 [Doc No. 54]). As a result of the SNB’s decision, the value of Niv’s personal
stock holdings dropped by over $100 million. Id. This loss dwarfs, by several orders of
magnitude, any alleged gain that the Defendants and non-Defendants experienced from their
stock sales. Further, Plaintiff never provides an explanation or even addresses these losses or
how they impact its scienter allegations. The most compelling inference from such a large
financial loss is that Defendants were caught off-guard by the SNB’s decision. See Acito v.
IMCERA Grp., Inc., 47 F.3d 47, 53 (2d Cir. 1995) (citing Denny v. Barber, 576 F.2d 465, 470
(2d Cir. 1978)) (“[D]efendants’ lack of clairvoyance simply does not constitute securities
fraud.”).
Second, Defendant Lande’s stock trades in this case are not unusual because they
occurred more than a year before the SNB’s decision. Lande sold stock in August and
September of 2013, more than a year prior to the SNB’s January 15, 2015 decision.6 See, e.g.,
Ressler v. Liz Claiborne, Inc., 75 F. Supp. 2d 43, 60 (E.D.N.Y. 1998), aff’d sub nom. Fishbaum
v. Liz Claiborne, Inc., 189 F.3d 460 (2d Cir. 1999) (because the stock “sales did not closely
follow the alleged misstatements and were not temporally related to the bad news, the flurry of
transactional activity by these defendants within a limited time period suggests not that there was

See Glaser v. The9, Ltd., 772 F. Supp. 2d 573, 587 (S.D.N.Y. 2011) (Holwell, J.) (“When a complaint
alleges only ‘incomplete information’ concerning insider sales, the court is ‘free to consider’ defendants’ SEC
filings to fill gaps on motion to dismiss.”) (citing In re eSpeed, Inc. Sec. Litig., 457 F. Supp. 2d 266, 290 n.182
(S.D.N.Y. 2006) (Scheindlin, J.).
6
Plaintiff failed to acknowledge in its Complaint that in March 2014, Lande purchased 7,500 shares for a
total of $121,125. See Pl.’s Opp’n at 28. Although Plaintiff is correct that the purchase of stock alone cannot
counteract the circumstantial evidence of fraudulent intent, In re MF Glob. Holdings Ltd. Sec. Litig., 982 F. Supp.
2d 277, 320 (S.D.N.Y. 2013) (Marrero, J.), here the combination of the timing of Lande’s sales and the March 2014
purchase provide more robust counteracting evidence.
5

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fraud, but that the sales were precipitated by some other factor”); In re Keyspan Corp. Sec. Litig.,
383 F. Supp. 2d 358, 385 (E.D.N.Y. 2003) (citation omitted) (a period of 4-6 weeks “negate[s]
any inference that defendants ‘sought to reap the immediate benefit a falsely positive statement
had on the market.’”). Plaintiff does not adequately explain why Lande’s sales raise a strong
inference of scienter when they occurred so long before the seminal event in this case, or why
Niv did not sell a single stock if Defendants were so aware of the risks facing FXCM. The
timing of Lande’s sales and Niv’s failure to sell any of his shares both undermine any strong
inference of fraudulent intent.
Third, the stock sales of non-Defendants Yusupov and Ahdout do not contribute to an
inference of scienter. Plaintiff fails to allege any connection between the alleged fraud and the
non-Defendants. See Alaska Laborers Employers Ret. Fund v. Scholastic Corp., No. 07-CV7402, 2011 WL 3427208, at *2 (S.D.N.Y. Aug. 3, 2011) (Daniels, J.) (“Plaintiff never set forth
facts demonstrating that the Individual Defendants engaged in any misconduct with the nondefendant insiders.”). Indeed, the only allegations regarding Yusupov and Ahdout pertain to
their job titles and stock sales. Without more, the Court cannot take a vast interpretative leap to
say that non-Defendants’ activities somehow give rise to a strong inference of fraudulent intent
on the part of the actual Defendants in this case.
Fourth, Plaintiff’s allegations regarding FXCM’s stock repurchase program do not
buttress its allegations of scienter. Normally, Courts find that share repurchases by a corporate
client may negate a finding of scienter. See, e.g., Tyler v. Liz Claiborne, Inc., 814 F. Supp. 2d
323, 338 (S.D.N.Y. 2011) (Holwell, J.); In re Thoratec Corp. Sec. Litig., No. C-04-03168, 2006
WL 1305226, at *11 (N.D. Cal. May 11, 2006) (“Inflating the price of the stock only to
repurchase it at the inflated price does not give rise to a strong inference that defendants had a

14

strong motive to fraudulently prop up Thoratec’s stock price.”). Plaintiff’s conclusory
allegations that Defendants maintained inflated stock prices in order to sell their shares at higher
prices are devoid of factual support.7 Moreover, if the alleged misstatements began in June
2013, it is illogical for Defendants to wait until November 2014 to expand their repurchase
program. Without more, the Court cannot conclude that the repurchase program strengthens the
inference of scienter.
Taken collectively, Plaintiff’s allegations fail to support a strong inference that
Defendants acted with scienter. At best, Plaintiff’s allegations permit a weak inference of
scienter—one that is less compelling than the inference that Defendants were blindsided by the
SNB’s decision.
2. Plaintiffs Fail to Allege Circumstantial Evidence of Conscious Misbehavior or
Recklessness
Because Plaintiff cannot raise a strong inference of scienter by alleging motive and
opportunity, the strength of its circumstantial evidence must be stronger in order to plead scienter
under the conscious misbehavior or recklessness prong. Plaintiff’s allegations fail to meet this
standard.
Plaintiff attempts to raise a strong inference of scienter based on circumstantial evidence
of conscious misbehavior or recklessness by alleging that (1) Confidential Witness 1 (“CW1”)
warned of the risks of FXCM’s approach toward the EUR/CHF pair and the possibility that there
would be huge losses if the SNB removed the peg; (2) Defendants knew about FXCM’s high-

7
Plaintiff attempts to plead new facts regarding the repurchase program in its Opposition to the Motion to
Dismiss. See Pl.’s Opp’n at 30 (citing to the November 6, 2014 call transcript). A party may not amend its
complaint through statements made in motion papers. See, e.g., Wright v. Ernst & Young LLP, 152 F.3d 169, 178
(2d Cir. 1998). Plaintiffs will have the opportunity to include additional allegations and documents if they choose to
re-plead.

15

risk business model and that the SNB’s decision could ruin their company; and (3) two of
FXCM’s competitors raised their margin requirements on the EUR/CHF pair in September 2014,
showing the increasing risk from the currency pair.8 See (Compl. ¶¶ 11, 42, 53, 58-63, 98); (Pl.’s
Opp’n at 23-27).
CW1’s scienter allegations are fundamentally undermined by the fact that s/he had a
“huge” bet against the SNB’s removal of the currency peg. Plaintiff relies heavily on CW1’s
repeated warnings to Brendan Callan, the CEO of FXCM Europe, that the company was exposed
to major risk on the EUR/CHF and could be in peril if the SNB de-pegged the Swiss Franc. See
(Compl. ¶¶ 44-67). However, in an email referenced in the Complaint, CW1—along with
expressing concerns about FXCM’s margin levels and no debit policy—states: “I personally
don’t think the peg is in danger. I actually float a huge long position against it.” (Pl.’s Opp’n at
12). This admission is fatal to Plaintiff’s scienter allegations. Any inference of scienter that
could be gleaned from CW1’s warnings is undermined by his personal belief that the SNB’s peg
would remain in place and by his willingness to bet a “huge” amount of his own money based on
this belief.
CW1’s warnings are also flawed because they significantly underestimated the effect of
the SNB’s decision. CW1 stated that if the 1.20 peg was removed, FXCM “may get 100 pips of
slippage.”9 (Compl. ¶ 58). However, after the SNB’s decision, there were, in fact, thousands of

8
Plaintiff also argues that it has properly alleged recklessness because Niv had access to and on occasion
would read the daily “Shift Report.” However, these Shift Reports did not contain CW1’s warnings to Brendan
Callan, the CEO of FXCM Europe. Plaintiff does not allege that the Shift Reports provided information about the
risks of FXCM’s model, only that the Reports likely noted that two competitors changed their margin requirements.
(Compl. ¶¶ 55-56).
9
A pip is movement of 1/100 of 1%. Thus, 100 pips are equivalent to a 1% change.

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pips of slippage. Thus, to the extent that FXCM officials believed CW1’s warnings, they may
have felt confident that they could successfully overcome a 1% change in price.10
Plaintiff’s allegations that Defendants knew that FXCM was pursuing a high-risk
business model, and knew the possible effect of the SNB’s decision, fail for two reasons. First,
Plaintiff clearly describes why Defendants had confidence in their business model and
safeguards. The Complaint notes that “[t]he largest and fastest changes in the currency prices of
any G-10 country in recent decades had occurred when the SNB first pegged its currency to the
euro in September 2011.” Id. ¶ 11. Yet, FXCM survived this major market event and became
one of the largest FX brokers in the world.11 See (Compl. ¶ 23). Thus, it makes sense that
Defendants believed that the same model and safeguards that helped them navigate the SNB’s
initial decision to peg the Swiss Franc to the Euro would also help them navigate the de-pegging
decision. Second, the Complaint and the Bloomberg Business article Plaintiff cites are replete
with references to the shocking and unexpected nature of the SNB’s decision. See id. ¶ 98;
David Evans, How Swiss Shock Humbled King of Leveraged Currency Trading, Bloomberg
Business (Jan. 20, 2015), http://www.bloomberg.com/news/articles/2015-01-20/how-swissshock-humbled-the-king-of-leveraged-currency-trading. For example, the Complaint describes

10

Defendant points out that CW1 also allegedly told Callan that if the SNB removed the peg and there was
no liquidity, “the prices will be terminal.” (Compl. ¶ 59). However, this warning is contradicted by the fact that
CW1 did not believe the peg was in danger and wagered his money that it would not be removed in the near future.
Furthermore, CW1 is never linked to Niv or Lande. Instead, all of his warnings were issued to Callan, who
allegedly reported directly to Niv because he was her superior. There is no allegation that Callan reported any of
CW1’s concerns to Niv or Lande. See, e.g., In re Wachovia Equity Sec. Litig., 753 F. Supp. 2d 326, 352 (S.D.N.Y.
2011) (Sullivan, J.) (“[T]here is no allegation that any CW met the Individual Defendants, reported any concerns,
received any instructions, or made any personal contact with them during the Class Period. The absence of such
communication undermines the inference that Defendants recklessly disregarded the truth.”); In re PXRE Grp., Ltd.,
Sec. Litig., 600 F. Supp. 2d 510, 537 (S.D.N.Y.) (Sullivan, J.), aff’d sub nom. Condra v. PXRE Grp. Ltd., 357 F.
App’x 393 (2d Cir. 2009) (Plaintiff failed to plead scienter because there is no allegation that confidential
informant’s concerns were brought to the attention of the individual defendants); Malin v. XL Capital Ltd., 499
F.Supp.2d 117, 141 (D. Conn. 2007).
11
Similarly, FXCM was able to halt its clients’ trading on the United States dollar versus Russian Ruble
when turmoil in Russia had caused the Ruble’s value to fluctuate greatly in the preceding weeks. See (Compl. ¶ 28).

17

the SNB’s decision as “a surprise” and a “shock event,” stating that investors were “shocked by
the speed and scale of the exchange rate moves that followed.” (Compl. ¶ 11, 32, 98-99).
Indeed, the Complaint notes that on December 19, 2014, FXCM research analyst Kristen Keir
said that “[a]t some point we believe market forces will force the SNB to abandon the floor, but
that looks a long way off.” Id. ¶ 39. The Court cannot find conscious misbehavior or
recklessness when Defendants’ business model had a successful track record and market
investors were shocked by the SNB’s decision.
Finally, Plaintiff’s allegations that two out of three of FXCM’s major competitors raised
their margin requirements on the EUR/CHF provide no information about Defendants’ conduct
or knowledge. See (Pl.’s Opp’n at 4, 10, 25). The fact that four different companies took two
different views about risks and how to adjust their exposure is hardly evidence sufficient to
impute scienter. See In re Wachovia Equity Sec. Litig., 753 F. Supp. 2d 326, 356 (S.D.N.Y.
2011) (Sullivan, J.) (“In any event, that Wachovia’s practices were distinguishable from those of
their competitors in some ways and not in others is not fraud, especially when Defendants made
no attempt to represent otherwise. Accordingly, the Court cannot impute an inference of
recklessness to Defendants based on the purported tension between two lending practices.”).
Plaintiff seeks to characterize Defendants’ failure to raise margin levels as evidence of their
conscious misbehavior or recklessness, but any such inference is undermined by a lack of
information regarding whether other brokers also raised their margin levels and the fact that one
of FXCM’s major competitors did not raise its margin requirements. Because Plaintiff is unable
to allege scienter based either on motive and opportunity, or on circumstantial evidence of

18

conscious misbehavior or recklessness, the Complaint fails to properly allege securities fraud
under Section 10(b) of the Exchange Act and Rule 10b-5.12
B. Loss Causation
Because Plaintiff fails to adequately plead scienter, the Court need not reach the issue of
loss causation. See, e.g., In re UBS AG Sec. Litig., No. 07-CV-11225, 2012 WL 4471265, at *22
(S.D.N.Y. Sept. 28, 2012) (Sullivan, J.) aff’d sub nom. City of Pontiac Policemen’s & Firemen’s
Ret. Sys. v. UBS AG, 752 F.3d 173 (2d Cir. 2014) (Because Plaintiffs’ inability to plead scienter
is fatal to their Section 10(b) claim, “the Court need not reach the UBS Defendants’ arguments
regarding . . . loss causation.”).
C. Plaintiff’s Other Claims
Because the Court concludes that Plaintiff fails to allege scienter, Plaintiff’s claims under
Section 20(a) of the Exchange Act also fail.
D. Leave to Re-plead
Rule 15(a) provides that leave to amend a complaint “shall be freely granted when justice
so requires.” See also ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 108 (2d Cir. 2007)
(“District courts typically grant plaintiffs at least one opportunity to plead fraud with greater
specificity when they dismiss under Rule 9(b).”). The Court grants Plaintiff thirty days from the
date of this Opinion and Order in which to re-file its Complaint.

12

Because the Court agrees with Defendants that Plaintiff has failed to allege a strong inference of scienter,
the Court does not address Defendants’ remaining arguments regarding material misrepresentations or omissions.

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IV.

CONCLUSION
For the foregoing reasons, Defendants’ Motion to Dismiss is GRANTED. Plaintiff is

given thirty days to file an amended complaint, should it choose to do so. This Opinion resolves
docket numbers 53 and 56.

SO ORDERED.
DATED:

New York, New York
August 18, 2016
/s/
KIMBA M. WOOD
United States District Judge

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