Karastathis v. FXDirectDealer, LLC

2014 NY Slip Op 30608

KHRIS KARASTATHIS, Plaintiff, v. FXDIRECTDEALER, LLC (FXDD), VALENTIN PEYTCHINOV,DON KETTELER, ROSEMARY BOVA, JOE RUNSDORF,JACK NAUS, and BURT STILLMAN, Defendants.

Index No. 112956/11

Motion Seq. No. 001

Motion Seq. No. 002

SUPREME COURT OF THE STATE OF NEW YORK COUNTY OF NEW YORK: IA PART 39

Submission Date: October 18, 2012

Dated: March 3, 2014

DECISION and ORDER

HON. SALI ANN SCARPULLA, J.:

Defendant FXDirectDealer, LLC ("FXDD")(motion sequence no. 001) moves pursuant to CPLR 2201, 3016(b), 3211(a)(1), 3211(a)(4) and 3211(a)(7) to dismiss the Verified Complaint or, in the alternative, for an order staying this action pending the outcome of a related class action pending in the Southern District of New York.¹

Defendant Don Ketteler ("Ketteler")(motion sequence no. 002) also moves to dismiss the Verified Complaint as asserted against him for failure to state a cause of action pursuant to CPLR 3211(a)(7) and for costs, disbursements and attorneys' fees pursuant to CPLR 8101, 8201, 8202 and 8303-a.

Background

This action involves plaintiff's use of FXDD's foreign exchange trading platform that was promoted as "seamless," but was allegedly slow, erratic, difficult to use, and designed to enable FXDD to profit from the losses of its customers.

FXDD is a global online provider of off-exchange foreign exchange trading and related services to retail, institutional and individual customers worldwide. Defendant Valentin Peytchinov was a managing partner at Whisper 1, LLC ("Whisper 1"), an investment firm created in 2005 and dissolved in 2009 which referred customers to FXDD. Defendants Ketteler, Rosemary Bova ("Bova"), Joe Runsdorf ("Runsdorf"), Jack Naus ("Naus") and Burt Stillman ("Stillman") were partners at Whisper 1.²

Plaintiff alleges that FXDD markets itself and its products through television, internet, direct mail, seminars, webinars and other media in order to attract customers to trade foreign currencies using its electronic trading platforms. As a part of its sales and marketing campaign, FXDD offers the use of a Demo Account through which potential customers can try out FXDD's trading platforms. FXDD purportedly represents that the Demo Account will mirror actual trading conditions and functions as a training tool simulating real-world tradingconditions. For instance, to trade on FXDD's platform, a customer must acknowledge in a written customer agreement that he or she

has conducted simulated trading using the [FXDD] Demo Trading Platforms or such other platform as FXDD shall make available for a period that has allowed the Customer to develop a full understanding of the FXDD Internet Trading Platforms or such other platforms as FXDD shall make available for online trading of Spot Foreign Exchange real-time trading.

Plaintiff further alleges that FXDD advertised on its website that "[t]he demo accounts are a great way to get a feel for live trading. We want customers to feel comfortable in our platform before placing real money in an account." Also, "[t]he demo accounts for both platforms mirror exactly what you will see if you sign-up for a live account, and [t]he pricing and spreads are the same in demo and live accounts." (emphasis added). However, plaintiff points out that after a class action was filed against FXDD in federal district court in New York,³ it removed this language from the FAQ section of its website. Now, under the heading "How Does the Demo Account Compare to a Live Account," FXDD states "[t]he pricing on the demo platforms, while indicative of live pricing, is not a mirror image of what you will see if you sign up for a live account, (emphasis added).

FXDD has also allegedly represented to customers that it provides a straight through process ("STP") model of trading for its customers, stating "[f]hrough our proprietary Straight Through Processing (STP) dealing engine, we seamlessly take interbank liquidity and pass it on to our clients. By applying this business philosophy it allows us to focus on facilitating our customers' trading orders, not on depleting our customers' trading accounts by trading against them." (emphasis added). In addition, FXDD promotes itself as offering "[t]ransparent and consistent interbank pricing and liquidity," and "transparent pricing that allows [individual traders] to maximize [their] trading profits," with "real-time margin monitoring capability in [its] unique, easy-to-read format...[because it]...believe[s]...[its]...[customers] need to know exactly where they stand in real time so that educated trading decisions can be made." Moreover, FXDD allegedly represents that its trading platform technology "is a fully redundant and secure application...which...was built with the latest technology to insure that you can enjoy uninterrupted service 24 hours a day."

Another component of FXDD's sales and marketing campaign is the use of a large network of "Introducing Brokers" which FXDD uses to refer customers to it for a fee or commission. Defendants Peytchinov and Ketteler were Introducing Brokers. In 2005, Peytchinov and Ketteler hosted a series of meetings (the "Meetings") at Ketteler's employer's apartment in New York, the purpose of which was to entice individuals to invest with Peytchinov and Ketteler's firm, Whisper 1, and to draw individuals to FXDD's trading platform.

In 2005, plaintiff began attending the Meetings. He alleges that during one such Meeting, Peytchinov urged him to open an account with FXDD and showed him a Demo Account of an FXDD trading platform. Peytchinov purportedly told plaintiff that if he opened a trading account with FXDD, Peytchinov would control the account and the account would have large gains. Plaintiff further alleges that Peytchinov assured him that the trading platform was designed to prevent losses of more than $25,000; a loss of $25,000 would trigger an automatic stop that would effectively prevent Peytchinov's clients from losing more than $25,000.

In purported reliance on these representations, plaintiff opened an account with FXDD (the "Account"), control of which he gave to Peytchinov and Whisper 1. When plaintiff opened the Account, he entered into a Customer Agreement with FXDD (the "Customer Agreement"), which provides that "due to market conditions or other circumstances, FXDD may be unable to execute the Order at the Market or specified level and the Customer agrees that FXDD will bear no liability for failure to execute such orders." (emphasis in original.) The Customer Agreement further provides that "all Market Order and non-Market Orders...are accepted by FXDD and undertaken on a 'best-efforts basis."' (italics in original.)

Plaintiff claims that after Peytchinov took control of the Account, Peytchinov lost a substantial amount of his money. Specifically, plaintiff deposited $750,000 in the Account in January 2006. That same month, the Account realized losses of $14,176.74. The following month, the Account realized losses of $575,854.71. Peytchinov blamed the losses on the FXDD trading platform, explaining that he and his partners were unable to close positions of five lots or more without excessive keystrokes for each lot. Further, Peytchinov and his partners were unable to place stops at the same price for all positions in the same currency pair, which he claimed is the most basic of all defensive trading strategies. In essence, Peytchinov claimed that adding or exiting positions on the FXDD software was needlessly complex, requiring several steps when there should have been few. As a result, Peytchinov was unable to make "smooth single click transactions."

Plaintiff alleges that Peytchinov's experience with the FXDD platform was not atypical and that other customers have complained of the following:

(a) Slow Server Command: when a customer is engaged in profitable trading activity, FXDD routes the customer's account to a slow server, causing the trade execution to be slowed down, giving FXDD the time to appropriate any potential profit in the trade by buying and selling in between the customer's order and the real market;

(b) False Error Messages: FXDD's administrative back-end console preventscustomers from closing out a profitable trade and instead causes the trading platform to generate one of a series of "error" messages to the customer, effectively blocking the customer's efforts to finalize what would have been a profitable trade; and (c) "Slow Fill" and "No Fill" Commands: FXDD often fails to execute valid and profitable trade orders entered by the customer and instead causes the trading system to generate a "slow fill" or "no fill" message to the customer as the customer attempts to close out a profitable trade, preventing the customer from making a profit while generating profits for FXDD.

Plaintiff filed a Summons and Verified Complaint dated March 14, 2012 asserting causes of action for (1) fraud against FXDD; (2) breach of contract against FXDD; (3) violation of General Business Law ("GBL") 349(h) against FXDD; (4) violation of GBL 350 against FXDD; and (5) civil conspiracy against FXDD, Peytchinov, Ketteler, Bova, Runsdorf, Naus and Stillman.

Discussion

It is well settled that

[o]n a motion to dismiss pursuant to CPLR 3211, the pleading is to be afforded a liberal construction. We accept the facts as alleged in the complaint as true, accord plaintiff's the benefit of every possible favorable inference, and determine only whether the facts as alleged fit within any cognizable legal theory. UnderCPLR 3211(a)(1), a dismissal is warranted only if the documentary evidence submitted conclusively establishes a defense to the asserted claims as a matter of law. In assessing a motion under CPLR 3211(a)(7), however, a court may freely consider affidavits submitted by the plaintiff to remedy any defects in the complaint and the criterion is whether the proponent of the pleading has a cause of action, not whether he has stated one.

Leon v. Martinez, 84 N.Y.2d 83, 87-88 (1994)(...