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Foreign currency broker FXCM is hit with $2-million fine

FXCM also agrees to pay back customers for money they lost because of practices described by the National Futures Assn. as unequal, inequitable and arbitrary.

August 16, 2011|By Nathaniel Popper, Los Angeles Times

Reporting from New York — The nation's largest foreign currency broker was hit with a $2-million fine and accused by regulators of profiting at the expense of its customers.

The fine levied against the broker, FXCM Inc., comes as foreign currency trading is growing in popularity among home investors but also coming under greater scrutiny for the large losses suffered by investors.

The $2-million sanction from the National Futures Assn. is the largest single fine ever imposed against a currency broker in the U.S., according to the NFA. The group's complaint said its investigation "revealed a number of deficiencies," including practices that were unequal, inequitable and arbitrary.

FXCM has said it is also the subject of a separate investigation by the Commodity Futures Trading Commission looking at similar issues.

In addition to the fine, FXCM has agreed to pay back customers for money they lost because of the practices. The company said it had put aside $8 million to do this.

FXCM did not admit or deny the allegations but said it took measures to address the problems when the NFA originally contacted it last August.

"FXCM continues to strengthen its compliance program and internal supervisory procedures," Chief Executive Drew Niv said in a statement.

The company has been one of the leaders in the growth of the retail foreign currency industry, which has seen revenue explode 374% just since 2007, drawing in 615,000 American traders, according to the Aite Group consulting firm.

FXCM said last week that it had 155,000 active accounts.

Critics of the industry have said that it uses intensive marketing to lure naive investors who rarely win. Roughly 75% of the customers of U.S. foreign currency brokers lost money last year.

Critics have also said the brokers can take advantage of unwitting customers because currencies are not listed on a public exchange like other assets traded by home investors. Instead, foreign currency brokers generally take the other side of their customers' trades, winning when the customer loses and losing when a customer wins.

Last fall the second-largest foreign currency broker, Gain Capital Holdings Inc., was hit by the NFA with a $459,000 fine for practices "that benefited Gain to the detriment of its customers," the complaint said.

The new complaint against FXCM discusses similar problems, though on wider scale. One unfair practice alleged by the NFA helped FXCM take in $650,000 from its customers during the first eight months of last year.

Gain Capital Holdings and FXCM have jointly sponsored a show about foreign currency trading on CNBC that began airing this spring.

The Securities and Exchange Commission recently issued an investor alert warning home investors about the risks of foreign currency trading. It did so at the same time that it instituted new rules for the industry that will be in place while regulators consider how to deal with currency trading moving forward.

A hedge fund investor who researches investment brokers wrote a letter to the SEC two weeks ago urging the agency to ban currency trading for unsophisticated investors. The investor, Justin Hughes of Philadelphia Financial, cheered the fines against FXCM.

"This is a good first step," Hughes said. "Hopefully the ongoing SEC review will make further improvements to the industry and highlight that this industry needs further regulation."

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