A recent Associated Press (AP) story reveals that Refco Inc.'s retail foreign-exchange customers have teamed up with Forex Trading LLC (FXCM) in a new lawsuit that seeks the return of at least $10 million from the company, which declared bankruptcy on October 17, 2005. What makes this interesting to me is that trader plaintiffs were joined in the lawsuit by FXCM, a former business partner of Refco's foreign-exchange subsidiary. According to the AP story, Forex Trading has served as trading manager since 2002 of at least 15,000 retail Refco foreign-exchange accounts.
Always concerned about motivations, I’m wondering why FXCM would feel the necessity to get involved. After all, they’re not on the hook ….. or are they?
In early June I related a story about a legal decision in South Africa that held referring brokers responsible for the misdeeds of those they refer clients to. Altogether, 1,850 investors lost 95 percent of their investments when Mauritius-based Leaderguard Spot Forex collapsed last year, resulting in South Africa's largest foreign-currency trading scandal. Investor losses totaled R350 million.
One has to wonder then if FXCM’s involvement is a diversionary tactic. I’m not an attorney and, therefore, don’t have a clue when it comes to the inner workings of our legal system so I am not in a position to offer legal advice, but if victimized traders connect the dots, FXCM could find itself in bind. Surely it’s not inconceivable that they could be held to the same standard and that would prove to be a catastrophic development for not only FXCM but its current trader clients.
If it were me and I had an FXCM account, I wouldn't be waiting around for the hammer to drop. I'd be closing my account immediately. Why? In FXCM’s latest financial report to the Commodity Futures Trade Commission, it reported that it only had $605,007 in Adjusted Net Capital which probably wouldn’t even cover legal expenses should Refco’s traders decide to go after them instead of trying to rewrite U.S. bankruptcy law.
I'm guessing most Refco traders would agree that it's better to be safe than sorry.
Postscript: I've received two emails from traders who pointed out that the financials I reported in my commentary were inaccurate because they didn't include Forex Capital Markets LLC's most recent report that it has $20+ million on the books, $5+ above their regulatory requirement. When I posted the article I was aware of that fact but did not include their financials because they're probably not on the hook. As I understand it, they didn't have a business relationship with Refco; their independent subsidiary (FXCM) did.
If someone can show me that there was some formal business agreement between Forex Capital Markets LLC and Refco, I'll be more than happy to correct the figures and note that it's conceivable they might both be held accountable as Refco's referral source. Until then, I think it's best they be treated as separate LLCs having distinct business interests and obligations.
As an additional footnote, I received a follow-up email from one those watchdogs that raises a more interesting question. In January 2006, Forex Capital Markets LLC reported that it had $35,131,671 in Adjusted Net Capital. At the end of July that number dropped to $20,224,347. Makes one wonder what's going on. A little profit taking before the end of the calendar year or might they be on the hook after all?
Recommended Additional Reading
Think You've Been Trading the Forex? Think Again
Advantages and Disadvantages of Non-Dealing Desk Trading
Did you like this post? Spread the word.
Social Bookmarking
