ASIC initiates penalty proceedings against USGFX, EuropeFX and TradeFred

Normally when a recognized national regulator such as Australia’s ASIC takes a Retail FX broker to court, it is a big deal. However the action just announced by ASIC against USGFX and two of its introducing brokers EuropeFX and TradeFred seems like something of an afterthought, as the parties are already well into administration and liquidation.

Also, if ASIC were to “win” anything in terms of fines of other compensation from the lawsuit it has initiated, that money would come at the expense of anything which might be returned to USGFX (and EuropeFX and TradeFred) clients and other creditors. In our latest report on the USGFX bankruptcy at the beginning of December we indicated that the company’s liquidators laid out a “high” recovery scenario for USGFX which would see clients get back up to 92 cents on the dollar, while unsecured creditors of the company would get at most 47% of their money back. In the “low” recovery scenario clients would get only 2 cents on the dollar, and unsecured creditors between 0-1%….

….unless ASIC decided to also go after the actual shareholders of each of USGFX, EuropeFX and TradeFred. ASIC has certainly done that before. In a recent lawsuit filed against iSignthis, ASIC named not just the company but also CEO John Karantzis. But at least for now, no individuals who owned/ran those entities were listed in ASIC’s lawsuit.

To the lawsuit details….

ASIC said that it has commenced civil penalty proceedings in the Federal Court of Australia against Union Standard International Group Pty Ltd (trading as USGFX) and its former corporate authorised representatives, Maxi EFX Global AU Pty Ltd (trading as EuropeFX) and BrightAU Capital Pty Ltd (trading as TradeFred).

ASIC alleges USGFX provided financial services including trading in margin FX products to clients in China in circumstances where it was illegal for Chinese residents to deal or trade in those foreign exchange contracts. ASIC alleges USGFX’s conduct placed its China-based clients at risk of contravening Chinese law, and thereby exposed them to potential administrative and criminal penalties under Chinese law.

ASIC alleges that USGFX failed to comply with its obligation to do all things necessary to ensure that the financial services covered by its licence were provided efficiently, honestly and fairly.

ASIC also alleges that each of EuropeFX and TradeFred:

• provided personal advice to clients when not licensed to do so;
• made false or misleading representations to clients including about the level of risk to which clients’ funds were exposed and the profits which clients could expect to generate; and
• engaged in unconscionable conduct, including by:
  • using high-pressure sales tactics to encourage clients to deposit more money, open more positions or discourage clients from withdrawing funds;
  • facilitating trading by clients who were at a disadvantage, for example, by virtue of the client’s trading inexperience, low level of income and lack of understanding of the complex products issued by Union Standard; and
  • failing to adequately explain or disclose to clients the risks involved in investing in its financial products.

ASIC also alleges USGFX:

• as the Australian financial services licensee, is liable for the above conduct of its corporate authorised representatives by operation of the general responsibility provisions of the Corporations Act and ASIC Act; and
• made false or misleading representations to potential clients.

ASIC said that it is seeking a range of relief including declarations of contraventions and pecuniary penalties.

A case management hearing is set for 8 March 2021.

USGFX was a Sydney-based retail over-the-counter (OTC) derivatives issuer offering clients opportunities to trade in margin foreign exchange contracts and contracts-for-difference (CFDs). USGFX and its former corporate authorised representatives, EuropeFX and TradeFred operated under USGFX’s Australian financial services (AFS) licence 302792.

In December 2019, ASIC obtained asset restraint orders in the Federal Court against EuropeFX and TradeFred to protect customers’ funds while an investigation was underway. USGFX gave an undertaking to the Court to keep specified monetary amounts in a separate bank account. On 8 July 2020, Union Standard entered into voluntary administration; liquidators were appointed on 3 September 2020. On 10 March 2020, TradeFred went into liquidation.

In July 2020, ASIC suspended the AFS licence of USGFX and in September 2020, ASIC cancelled its AFS licence.