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IronFX merger plans shed new light on its “Chinese Withdrawal” debacle

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Ever had the feeling that you cannot win for losing? The management team at IronFX hit the headlines a month back with news of a complicated reverse merger, but, as soon as that “win” was posted on the business scoreboard, subsequent investigations have revealed a sordid tale of Chinese Introducing Brokers, abusive traders, and political intrigue that rivals any season of the “Game of Thrones.” This story has been lingering in the shadows, kept alive by way of complaint blogs, blatant office attacks, court filings, and one bold heckler that accosted the head of CySEC during a speaking engagement.

Truth can be better than fiction at times. In the case of IronFX, it has been a rollercoaster ride since its opening in 2010. It burst on the scene with an aggressive marketing scheme that included hefty welcoming bonuses and fat commissions for its burgeoning network of Introducing Brokers (IBs). Competitors cried foul, but IronFX was a success story in the retail forex trading industry that rose to stardom far too quickly, according to many business analysts. Public IPO documents, which were not used from a few years ago, spoke to a firm with 60 offices and 1,600 employees. Since those Herculean times, the company has gone through a number of downsizings, falling to 8 offices and only 300 employees, based on pending merger documentation.

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How did such a high flyer fall so far and so fast over the last three years?
The pivotal year seems to have been 2014. Clues can be found in the broker’s unique business plan, which many competitors emulated, especially in the Asia/Pacific region. When you promise large bonuses and personal hand-to-hand service, your front-end investment costs tend to be on the high side. The “bet” is that you will make it up on volume, as long as that volume continues to rocket upwards at an ever increasing rate or the client is required to trade an exorbitant amount, while his funds are locked down.

Volume was skyrocketing for a while, but competitors began to take their toll. Client complaints began to rise when the impact of the small print began to take hold to delay withdrawal requests from being honored. Brokers have developed a number of complex formulas that govern when and if a withdrawal of client-only deposits, let alone the bonus funds on account, can be processed. IronFX has its own form of “lock down” terms.

Traders, however, especially the ones that are enticed by large promotional bonuses, rarely read the fine print that specifically ties up the bonus funds and occasionally other funds, as well. They tend to be unaware that, by accepting a bonus up front, they have committed to making a high volume of trades before any type of withdrawal will be permitted. The broker hopes to recover his bonus during this period, and, as for neophyte traders, they might as well kiss their funds goodbye, unless they are skilled.

Why did the regulators not shut down these questionable business practices?

Regulators are not a court of law. Their role is to protect consumers, not legislate refunds, rebates or withdrawals. A regulator may question the adequacy of disclosures, but, at the end of the day, the buyer is the responsible party. He must read, understand, and accept the terms and conditions, as laid down by the broker. Those terms form the basis of a contract, and, if there is an issue as to a rights violation, then it must be adjudicated in a court of law or follow the rules in the contract that stipulate how disputes will be settled.

You can rest assured that these terms have stood the test of time. Lawyers for each broker have devised these contracts to protect their client, the broker. Each paragraph is there for a reason, added perhaps after an unfavorable ruling went against the broker. A few brokers actually require that you speak with a customer service representative to ensure that there is no misunderstanding. The brokers that automatically adds fund to your account without so much as an “asterisk” to warn you of the consequences are walking a very thin tightrope. These brokers are typically in far off jurisdictions where you would have no chance of pressing your legal rights, even if you could.

What exactly was the IronFX “Chinese Withdrawal” debacle?

Investing heavily up front in new customer acquisition costs was a risk that IronFX was willing to take, but they were not willing to accept that clients would conspire to game their promotional and commission structure. To hedge against this possibility, the terms and conditions stated that, if “abusive trading strategies” were employed, then the firm had the right to freeze accounts, pending a complete investigation of client trading behavior. These terms may have offered protection for the broker, but IronFX had no idea of the extent of abusive trading or the public relations nightmare that was to come.

In China, the preferred marketing approach was to build an IB network that would find new clients with search engines (Baidu is the Google of China) and receive commissions, based on the trading volume of new recruits. Details are sketchy at this juncture, but IronFX staff began to suspect foul play when losses began to mount for the Shanghai operation. IBs seemed to be adding the same people from the same servers, and these clients were using specially programmed Expert Advisors and cross-hedging techniques to abuse the firm’s bonus and commission system.

The conspiracy, as IronFX called it, was widespread. Staff moved quickly to freeze all accounts under suspicion and put a block on any attempts to make withdrawals. No one foresaw the consequences of these actions, but here is a recap of what followed:

•    During the latter half of 2014, IronFX began freezing accounts and giving affected customers a notice that read, “We would like to inform you that your account is under investigation for potential irregular trading activities.”
•    The size of the freeze impacted over 150 accounts provided by IBs with fund balances that totaled $1.25 million, as revealed in court documents that were filed in January with the district court in Limassol on behalf of 160 parties;
•    In late August, a local television station ran a searing review of IronFX in a 20-minute segment that purported that IronFX was running an illegal operation in China, accusing the firm of foul play. The video went viral, creating a public relations disaster. IronFX claimed that all was untrue and that “our lawyers are taking the necessary legal steps against the TV station.”
•    The damage, however, was done. According to a local website, “A client burst into IronFX’s offices with a knife and threatened an executive to approve his withdrawal by the next day, else he would kill him. According to the report, the attacker did indeed receive his money back the following day.”
•    Following the knife attacker’s success, a mob of protesters “stormed and vandalized the office and, according to the report, even physically attacked the manager.”
•    The formal reply from IronFX was, “We have identified a group of Abusive Traders that employ an abusive trading strategy to manipulate our Promotions. This group has been placed under investigation for breach of our trading terms and pending this investigation we have put a limitation on all Promotions-related withdrawals from this abusive trading strategy as we are entitled to do.” They went on to reiterate that they were doing nothing illegal and were employing methods that other brokers in the region had used.

Bad press and high complaint levels forced CySEC to take action.

Based on mounting public pressure, CySEC officials began an investigation of the IronFX operation in February of 2015. At its peak in 2014, the broker was a major leader in the industry with nearly a trillion dollars in annual turnover and hundreds of thousands of clients. The Chinese problem impacted less than 0.17% of its client base, but the PR disaster and CySEC intervention caused a run on the bank, so to speak.

After months of toiling over records, CySEC officials reached a conclusion and slapped the broker’s hands in November with a €335,000 fine for what it deemed as “a possibility that the company has been in violation of the legislative framework under which Cyprus Investment Firms operate.” In situations such as these, regulators will typically suspend the license of the offending party, as well, until procedures are brought back into compliance, but such was not the case with IronFX.

Protests continued. Angry traders and their lawyers gained the support of opposition party politicians to challenge the ruling of CySEC and demand that withdrawal requests be honored. It was now May of 2016, six months after the ruling, yet IronFX still claimed that “abusive trading strategies” were at the heart of the matter. Soon thereafter, Demetra Kalogerou, the Chairwoman of the CySEC, had concluded a speech at the iFX Expo in Limassol, when “a man asserting to be a client of IronFX disrupted the event by loudly criticizing the regulator for failing to meet its mandate.”

The shouting has continued to this day. IronFX has paid its fine, but the questionable accounts remain in a “Hold” position. When lawyers demand that CySEC step in and help their clients, they are curtly informed, “Although the CySEC has powers to take measures (which include monetary sanctions) against CIFs, it has no powers to order the payment of compensation/restitution of damages suffered.”

When asked why CySEC only requested a fine and not restitution, Ms. Demetra has publicly explained that, “The amount of a settlement isn’t directly or indirectly linked to the amount potentially needed for compensation. CySEC does not have any restitution powers over compensation of investors. Those who seek compensation have the right to go to the financial ombudsman or the courts.”

Concluding Remarks

What are the lessons to be learned from the IronFX experience? First, high-flying brokers tend to return to earth suddenly. In 2014, IronFX was valued at $800 million. Today, the Nukkleus reverse merger is hoping to achieve a valuation over $200 million. Second, always read the fine print related to promotional bonuses and their impact on your ability to make withdrawals. The majority of broker complaints today revolve around this single issue.

Lastly, if your broker is continually in the news, it is time to take note and to consider making a switch. If the issues persist without a quick resolution, then that tells you something about how you might be treated down the line. Due diligence related to broker selection includes monitoring future performance.