IronFX, mired in controversy, continues to be the poster child for how a high-flying forex broker can be brought to its knees by its own aggressive marketing tactics. But wait a minute. This broker has refused to throw in the towel. It may be late in the fight, but the management at IronFX battles on through the courts, while maintaining as low a profile in the press as possible. The latter effort has been a challenge, as investigative reporters from around the globe have tried their best to zero in on the facts. Unfortunately, for their readers, “the facts” have been mysteriously few and far between.
The scarcity of what really is the truth in this sordid affair, however, has not stopped the flow of negative headlines, which tend to be based more on opinions of the author than upon what may have truly transpired. Are we to believe that IronFX, a major player on the global forex scene, has deliberately and publicly defrauded a portion of its customer base of $176 million? Are we to believe that the regulatory establishment across Europe has condoned these actions and is thereby corrupt at its core? Have consumers sustained heavy losses with no recourse? What are we to believe at this juncture in the proceedings?
The latest news is that disgruntled investors, whose claims were summarily dismissed by the Ombudsman appointed by CySEC to resolve the matter, have now had their petition heard by the European Parliament. This austere group was set to discuss the aforesaid petition on July 11th, and investors, attorneys, and reporters are eagerly awaiting the findings of this group.
The details of the petition are public. A citizen of the EU, not a class action for a group, “has the right to present a petition to the European Parliament on a matter which comes within the union’s sphere of influence. “ As per court filings: “Τhe petitioner is an investor who used the Forex brokerage services of IronFX in Cyprus and is among the thousands to claim that they have been defrauded by it. He has not been able to access the funds on his account for more than six months and doubts whether this will ever be possible. He further estimates that the amounts withheld by the company are in the hundreds of millions.“
One reporter also noted that, “The petition, which is supported thus far by 50 European citizens, is the result of CySEC’s almost non-existent response to the clients’ complaints. The regulator repeatedly insists that it doesn’t have criminal prosecution powers. However the Cypriot watchdog has suspended and fined firms and revoked licenses – but not against IronFx.” In actual fact, over 1,500 complaints were submitted to CySEC, but the agency concluded that IronFX had abided by the terms of its contract in each and every case, thereby suggesting that no wrongdoing was present.
How and when did this IronFX controversy originate?
As we reported a year ago: “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 6 offices and only 200 employees, based on pending merger documentation.”
The last reference to “pending merger documentation” relates to a very complicated reverse merger between IronFX and FXDD that was announced roughly at the time of our article. It appeared that a “White Knight” had appeared on the scene to rescue the beleaguered broker from its travails, but, as soon as the publicity of a merger had hit the wires, attorneys for the opposition launched a publicity onslaught of their own. News of the merger soon died, as both parties denied the will to move forward with what many had described as a misguided publicity stunt.
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.
Ads like the following example cast their nets far and wide, especially in China:
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 acts, but protestors stormed the IronFX facilities, vandalized the offices, and threatened the manager at knifepoint to return their funds. The fellow with the knife received his refund, but the others have been forced to go to court. Management for IronFX claimed no wrongdoing because it had “identified a group of ‘Abusive Traders’ that employ an abusive trading strategy to manipulate our Promotions.” The firm had a right to act as it did, as had other brokers in the region.
With so many angry investors, why have regulators ignored their pleas?
As another reporter wrote, “The question in the minds of pretty much every retail FX industry professional in the world, in all capacities ranging from brokerages to IBs, is often ‘How on earth is IronFX still in business?’” With over 1,500 complaints, CySEC ruled in the favor of the brokerage. Is the system corrupt? Allegations of this type have been proffered by many, but to no avail. At the end of the day, 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.”
CySEC does not have the power to restitute consumer funds, although ”does not condone the withholding of client funds against the clients will.” The regulator forwarded the issue to the Cyprus Financial Ombudsman Service, which performed its duty, reviewed 1,512 disputes, and issued rulings, none of which are public. As expected, a public outcry came next, when CySEC refused to suspend the license of IronFX. CySEC and IronFX reached a settlement 330,000 EUR with no wrong-doing proven. Many are now insinuating that corruption is rife and that the Ombudsman relied on information supplied by an IronFX attorney, all good fodder for “click bait” articles on the Internet.
And so the claimants must now wait to hear from the European Parliament. IronFX has continued with its aggressive marketing tactics, offering large bonuses to new clients, a practice, which CySEC no longer condones. Global brokers, however, have organized corporate operating entities across the globe in a complicated web that basically thwarts the ability of any regulator to act, unless citizens in its own country or region are disadvantaged. Cyprus has very few forex traders within its borders. IronFX, on the other hand, needs new customers and is going about its business, trying to grow and survive.
Despite the furor in the press, IronFX has not been found guilty of fraud or bad business practices. Its CySEC license remains in full force, although it did come to a settlement as a consequence of its travails in China. At some point, it must resolve the customer balance issues within its organization. Funds cannot be frozen for eternity. Facts regarding abusive trading practices have not been forthcoming, but the firm’s evidence must be convincing when disclosed in a confidential court setting, or verdicts against its actions would surely have been issued.
For the time being, matters are on hold until the next public announcement. The IronFX story will continue to intrigue the masses, until the true facts are made public. Until then, remember trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors.