Liquidators of Forex CT suing ASIC over $20m fine, saying money should go to company’s victims

Forex CT cost retail punters more than $77m in trading losses. Liquidators want ASIC to hand over a $20m fine levied on the company, saying it should go to the victims.

FTI says its investigations into the company’s books suggest that only about 10.5 per cent of Forex CT clients made any profit trading through the company. Picture: AFP

The liquidators of boiler room fraud Forex CT are suing the corporate regulator for the return of $21.5m in fines and costs levied against the foreign exchange broker, saying the cash should be returned to victims of the company rather than sitting in government coffers.

FTI Consulting’s Daniel Woodhouse and Ross Blakely took the unusual step of launching legal action against the Australian Securities and Investments Commission on behalf of about 8600 former clients of the company.

The company used high pressure sales tactics on clients who largely had little understanding of the complex foreign exchange and derivative products being pushed, according to findings made by the Federal Court.

Forex CT was finally shut down by ASIC in 2020, when the corporate regulator cancelled its Australian Financial Services Licence, and in 2021 agreed to pay a $20m fine and $1.5m in costs to ASIC to settle allegations the company’s high pressure sales tactics were unconscionable, and its Australian boiler room misled and deceived Forex CT clients.

The company collapsed shortly after paying the fine using money transferred from its overseas parent company, Gibraltar-registered Invesus, and called in FTI as voluntary liquidators.

But FTI says the company’s former clients should have been counted as creditors, as they would have valid claims against the company for their losses given Forex CT’s conduct.

ASIC sought no compensation for the company’s victims as part of its agreed settlement, and the $20m fine ordered by the Federal Court in 2021 would have been sent straight to the federal government’s consolidated revenue account.

FTI says Forex CT’s victims — who collectively suffered more than $77m in net losses — can’t understand why they have received no compensation, despite the fine levied against the company.

A spokesman for ASIC declined to comment on the court case on Wednesday, as the matter is before the court.

“ASIC seeks to use enforcement action, including the seeking of penalties in court proceedings, to deter misconduct,” he said.

After failing to get ASIC to agree to a compensation scheme over the last two years, the Forex CT liquidators are now suing the corporate watchdog, arguing the $21.5m in fines and costs were an “unfair preference” payment that can be reclaimed and distributed fairly to all of the company’s creditors, including Forex CT’s victims.

The liquidators of Forex CT are suing ASIC for the return of a $20m fine, arguing the money should go to the victims of the boiler room operation.

Unfair preference claims are usually made by company administrators and liquidators where one commercial creditor has received a payment ahead of other unsecured creditors – in many cases due to personal relationships between company employees and directors, or because the creditor has some other form of leverage over the struggling company.

FTI’s legal action against ASIC is believed to be the first of its kind relating to a court-ordered fine. But the Australian Taxation Office regularly returns money to liquidators, and stands in line to receive the same distribution as other creditors when the liquidation is completed.

FTI was also pursuing Forex CT’s offshore parent companies for its client’s losses, but has told creditors and victims the prospects of any recoveries are relatively slim.

But in a statement of claim lodged in the Federal Court, FTI liquidators say they believe the ASIC payments should be considered in the same way as any other unfair preference payments made to trade creditors.

FTI will argue that Forex CT was effectively insolvent the moment the Federal Court made orders directing the company to pay the $20m fine and $1.5m in costs to ASIC, given it was forced to seek money from its offshore parent to make the payments.

The admissions of unconscionable conduct made in 2021 mean that ASIC, the company and its sole director – Shlomo Yoshai, fined $400,000 and banned from acting as a company director for eight years in the same Federal Court decision – should also have known at the time that Forex CT’s clients had valid claims against the company and should therefore have been considered creditors.

Federal Court judge John Middleton made damning findings against Forex CT in his 2021 judgment, saying Forex CT’s unfair tactics included pressuring clients to deposit more money and make bigger trades despite having already racked up huge trading losses.

Forex CT offered margin foreign exchange instruments (Margin FX) and/or contracts for difference (CFDs) to mostly unsophisticated retail clients, Justice Middleton found, offering leverage of up to 400 to one for some of its trades.

In addition, the Forex CT clients were effectively trading against the company, and the pay of employees in its Melbourne-based boiler room was linked to their ability to convince clients to deposit more cash and make more trades.

“Forex CT issued the products by entering into a private contract with the retail client and, as issuer, was the counterparty to every transaction by which a client placed a trade or opened a position,” the judgment said.

“Forex CT did not directly hedge trades placed by clients and so it benefited whenever a transaction was closed at a loss to the client and made a loss whenever a transaction was closed with a gain to the client.”

Justice Middleton said customers suffered net losses of around $77.6m, which translated to a corresponding net gain for Forex CT.

FTI says its investigations into the company’s books suggest that only about 10.5 per cent of Forex CT clients made any profit trading through the company, and the company’s staff were coached in ways to talk loss-making clients into sinking even more money into their trading account.

Clients who had stopped trading after making losses were also bombarded with calls, FTI investigations found. The company also sought to entice fresh deposits cash by offering to match the new contributions by clients who were actually seeking to withdraw money from trading accounts or liquidate their positions.