Court Takes First Action Against Forex Company, Freezes Assets

Client claims currency broker acted against his interests.

Shani Mizrahi, Sarit Menahem
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Shani Mizrahi, Sarit Menahem

In a highly unusual move for Israel's unregulated foreign exchange sector, last week the Tel Aviv District Court ordered the temporary seizure of NIS 5.7 million of assets of Forex Place. In issuing the order, Judge Hagai Brenner accepted a suit filed against the company and its owners and executives by a client.

The company is owned by Yair Abramov, Benny Abramov and Shimon Cohen. Asaf Bram and Oz Sasi of the law office Bram, Dachoach & Co. represented the plaintiff in filing the lawsuit. The defendants haven't yet filed their defense.

Moshe Tery. Credit: Moti Kimche

In his suit, Majid Sheikh, a businessman from northern Israel, claimed that the negligent conduct of Forex Place in managing his portfolio cost him his entire NIS 5.4 million investment with the company.

Forex companies provide investors an online platform to trade foreign currencies through their home computers. The industry has grown rapidly in recent years, turning over billions of dollars a month. About 10 firms are active in the market, several belonging to the same owners. Considered a legitimate industry, nonetheless it is unregulated. Starting a forex company requires no permits or inspections, which may help explain why almost everyone investing through them records trading losses.

According to the lawsuit, Sheikh was invited by one of the company's agents in October 2009 to a meeting with its Haifa branch managers, Ze'ev Hemed and Gal Segal, during which he was told that Forex Place earns all its income from commissions on clients' buy and sell orders. He was also told that the company had an interest in him profiting for the commissions it would provide.

Sheikh invested NIS 5.4 million with the company and lost it all within three months. In his lawsuit Sheikh argued that he hadn't been told the truth: "In practice Forex Place doesn't cover itself on its clients' positions, or at most does so selectively, meaning that the company takes opposing positions from its clients - its clients' losses are its own gains. Forex Holding [a subsidiary of Forex Place] was compensated to a large degree by Forex Place for the losses of its clients, as were its employees."

Forex Place's conflict of interest, according to the lawsuit, is a major argument in the plaintiff's case.

"In retrospect it became clear that Forex Place received the money but didn't register it under Sheikh's name, and neither were transactions executed under his name," says the lawsuit. "Immediately after he deposited his money, if fact, it was used by Forex Place for various purposes, but not trading... At about the time the damages were calculated, one employee admitted that others were compensated using the 'net' method - depositing and eliminating his money."

"It is inconceivable that Forex Place employees would assist the plaintiff in managing his investment through presentations, explanations, advice and guidance while they benefited from his losses," continues the lawsuit. "Forex Place considered Sheikh's portfolio a 'special project' and acted to wipe it out even more than other portfolios."

"We received the lawsuit and are studying it," Forex Place said. The company claimed that frm a superfician examination, it seems to be the same complaint that the same client made a year before. But the complaint had been put to rest at the time with his consent, the company said, adding that its answers would be given in court.

Sheikh's main claim about Forex Place's conduct isn't unique and is considered the industry's main problem: Forex companies supposedly calculate their exposure to every currency at any given time and cover it through banks or other large currency-trading financial institutions.

But some forex companies choose not to cover themselves, avoiding hedging, saving on costs and raising their profit potential - but providing fertile ground for conflict of interest with their customers. If a forex company remains uncovered on transactions, that is, it does not perform counteractive transactions providing identical profits to those of its investors, every action an investor performs will be against the forex company.

If a position opened by the investor proves successful and profitable, it it isn't covered - the forex company itself will have to foot the bill. Since the company hasn't covered itself it will need to pay the investor's profits from its own pocket, so that the investor's profit is the forex company's loss, and vice versa. In such a case it is in the forex companies' interest that its investors lose.

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