Gain Capital, the internet-based forex trading platform, has reacted angrily to a $10 million lawsuit filed against it in New York, saying that the claim is baseless and factually inaccurate.
The US network, which transacted over $200 billion in volume in 2002, is accused of defrauding clients and knowingly misleading them about their account performance. The complaint relates to business that Gain handled in association with Sterling Forex, a money manager.
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The complaint was filed in January by Spencer Rawlins, a former F-14 pilot for the US Navy. He is just one of the thousands of retail investors who have been attracted to the healthy returns that forex funds can offer (see chart). He opened an account managed by Sterling, and he says he was repeatedly told that his funds were performing well, even though they had actually lost about 80% of their value.
Sterling, which cleared its accounts with Gain, has since shut down and been fined by the Commodity Futures Trading Commission (CFTC). Rawlins is now attempting to sue both companies for his losses, even though Gain did not make any investment decisions on his behalf.
Rawlins personally lost $36,500 by trading forex, and claims he was not properly made aware of the balance of his account. The complaint reads: “Both Sterling and Gain were aware of the true positions and balances in plaintiff’s account but failed to disclose them to plaintiff.”
Annoyance
But Gain, which serves mainly retail customers, says the suit will not impede efforts to reach new institutional clients. “This is an annoyance rather than anything else,” says Gain managing director Glenn Stevens. “It is a nuisance, and there is an element of sensationalism. But we haven’t had to make any changes to our policies and procedures.” Stevens sympathizes with Rawlin’s position but he urges investors to conduct more due diligence on companies that manage their funds. “The culpability has to stop somewhere … At this stage we can only address the complaint and point out the errors,” he says. Stevens adds: “There are constantly stories about a disgruntled investor who goes after the money manager and then after the clearer. Sterling was the money manager, raising its own funds and making the trading decisions for their client’s accounts. Gain’s job is to clear the trades and maintain safe custody of funds, and that’s what we did.”
Rawlins’ case states that customers monitored their accounts through the Gain website. The complaint states: “Gain was aware of Sterling’s promises of transparency and real-time access to their accounts. It was Gain that ran the software and provided the platform for class members to view their accounts… What Gain and Sterling failed to tell investors was that they were only being given partial access to their balances and were not seeing all open positions marked to market.”
He says his balance at various points appeared unchanged, even after a CFTC investigation into Sterling became public in October 2002. On November 6, his account even appeared to be making a profit. In fact, it was losing money, which became clear only on November 8. In a statement, Gain says that it provided all of Sterling’s customers with access to account activity.
As it stands, the case is simply a complaint, and it is unclear how long it will take for it to be concluded. “We are filing a motion to dismiss,” says Sam Roady, who handles client liaison at Gain. “And after that there are three more steps before there’s even a chance of a trial. This process could take a couple of months, or it could take a year.” Being successfully sued for $10 million would be a big blow to Gain, which holds under $2.5 million in adjusted net capital, according to monthly CFTC figures. But Gain is confident of a dismissal.
The platform insists that it has some of the strictest rules in the business, having been regulated by the CFTC since late 2001. “Fortunately we were an early bird in terms of getting regulated – we did it from the start,” says Stevens. “That is more onerous. It makes our policies and reporting more onerous. But we felt that for the long-term business model, we needed to go down that route. We are often given a hard time because of the thickness of our application. From a sales person’s perspective it is a burdensome process, and we do lose some customers because the threshold is so high.”
Some investors are clearly alarmed about the case, but Gain says it has not lost any clients as a result of this case, and its liquidity providers appear unfazed. The platform has in fact attracted new liquidity providers since the case came to light, and some banks have also increased their existing credit lines to the platform. Gain also continues to work with the CFTC as the regulator hones its rules on forex trading.
