FXCM Sued By CFTC For Improper Customer ‘Guarantees’; Company Denial Rings Hollow

Shortly after the Swiss National Bank removed its peg to the Euro in January 2015, I released a multi-part Stock Plaza expose on FXCM’s (NYSE:FXCM) misleading marketing.

Jan 29, 2015: FXCM Spin Game Doesn’t Change Its Misleading Marketing And Disclosures

Feb 2, 2015: Misleading Marketing, Poor Risk Management, And Bad Trade Recommendations Dog FXCM

Feb 9, 2015: Peeling The Onion Of FXCM’s Misleading Marketing

Apr 23, 2015: FXCM Inc.: Retail Forex Is In Global Regulators’ Crosshairs

Though it has taken nearly a year and a half, the Commodity Futures Trading Commission (US regulators) announced the filing of a civil suit against FXCM on August 18, 2016. Among other allegations, the suit contends that:

FXCM guaranteed against customer losses, by “zeroing out negative customer balances,” which is a CFTC violation.

CFTC rules explicitly prohibit a retail currency dealer such as FXCM from representing it “will guarantee customers against loss, limit the loss of customers, or not call for or attempt to collect security deposits, margin, or other deposits of customers.”

The company issued a statement, asserting that:

we also see no basis for CFTC’s claim that company improperly guaranteed customers that they would not lose money

Those of you familiar with my past reporting will note that my focus was on FXCM’s attempts to collect from customers in spite of appearing to have made numerous representations in its marketing materials that it would not attempt to collect negative balances. I was not aware, at the time, that the mere existence of such representations might have constituted a CFTC rules violation.

Among the examples of possible “guarantees” or “limitations of loss” in marketing materials that I observed in 2015 were:

• A narrator on one official marketing video on the FXCM YouTube channel clearly and unequivocally stated:

“FXCM guarantees a client’s trading risk is limited to the equity in their account. This means you will never owe a deficit balance as a result of trading even if a significant amount of leverage is used. This is an important safeguard most forex brokers don’t provide.”

• A company document ironically titled, “The Truth About Forex”, on the company-owned FXCMasia.com website, stated on page 5:

“We operate with a No Debit Balance Guarantee. If your losses become too large, our system will automatically liquidate all open positions at the best available price. Typically, the system can get you out before your account would become negative. In the rare case where it cannot, FXCM will credit your account back to zero. You can never owe FXCM money due to trading losses.”

• The US FXCM.com website, in a section devoted to informing active traders about Margin, contained the text:

“We guarantee you can never pay a debit balance.”

• A 2010 company press release for FXCM Australia stated:

“Unlike margin trading through other providers, FXCM guarantees that you will never have to pay a deficit balance as a result of trading!”

• A FXCM Product Disclosure Statement and a Risk Warning on the FXCM.com website stated:

“…account equity can fall below margin requirements at the time orders are filled, even to the point where account equity becomes negative. This is especially true during market gaps or volatile periods. FXCM will not hold traders responsible for deficit balances in this scenario, but clients should be cognizant that all funds on deposit in an account are subject to loss.”

• A User Guide on the official FXCM.com website stated:

“It is FXCM’s policy to credit accounts to a zero balance when debit balances occur as a result of trading. One of the greatest concerns traders have about leverage is that a sizable loss could result in owing money to their broker. At FXCM, your maximum risk of loss is limited by the amount in your account.”

• An official FXCM UK Twitter account tweeted in 2011:

“FXCM traders have peace of mind knowing that they are not responsible for account deficit balances as result of trading.”

Maybe FXCM would like to amend its official statement…

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Stock Plaza). I have no business relationship with any company whose stock is mentioned in this article.

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