On September 29, 2017, Saxena White secured a major victory with an important decision issued by the Delaware Court of Chancery in Kandell v. Niv et al., C.A. No. 11812-VCG. In a 54-page opinion, Vice Chancellor Sam Glasscock III denied defendants’ motion to dismiss with respect to the three most significant counts of the plaintiff’s complaint.
The complaint alleged that FXCM’s business model violated CFTC Regulation 5.16, which prohibits foreign exchange trading firms like FXCM from representing in any way that they are guaranteeing their customers against losses from trading activity. The regulation was implemented to protect companies from becoming undercapitalized and forced into bankruptcy when volatile events cause large customer losses. But FXCM’s board of directors ignored Regulation 5.16 and instead promoted in marketing and customer agreements that customers would never owe debit balances to FXCM. This guarantee allowed FXCM to grow its customer base and its commissions, while at the same time increasing the company’s risks. Indeed, with many of its domestic customers leveraged at ratios of 50:1 (with overseas customers leveraged as high as 200:1), FXCM’s guarantees meant that the company was on the hook for its customers’ highly risky foreign exchange bets. When the Swiss National Bank announced on January 15, 2015 that it was unpegging the Swiss franc from the euro, extreme market volatility caused FXCM customers to lose $276 million, forcing FXCM to seek emergency funding from Leucadia National Corporation. In response, FXCM’s stock dropped 89% in two trading days. The complaint focused on FXCM’s business model and the Leucadia loan, asserting claims for breach of fiduciary duty against FXCM’s current and former directors.
In denying the defendants’ motion to dismiss, the court found that “the Regulation itself is so clear on its face that . . . it [is] reasonably likely that the directors knowingly condoned illegal behavior.” With respect to the Leucadia loan—which, according to a Citibank analyst “essentially wiped out” the value of FXCM’s stock—the court held the alleged facts indicate that the transaction was not approved by a board with a majority of disinterested and independent directors, and that it is reasonably likely that the entire fairness standard of review will apply. Once the entire fairness standard is triggered, the corporate board has the burden of demonstrating that the transaction is inherently fair as to both process and price.
