   IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

BRETT KANDELL, Derivatively on   )
Behalf of Nominal Defendant, FXCM,
                                 )
Inc.,                            )
                                 )
              Plaintiff,         )
                                 )
    v.                           ) C.A. No. 11812-VCG
                                 )
DROR NIV, WILLIAM AHDOUT,        )
KENNETH GROSSMAN, DAVID          )
SAKHAI, EDUARD YUSUPOV,          )
JAMES G. BROWN, ROBIN DAVIS,     )
PERRY FISH, ARTHUR GRUEN, ERIC )
LEGOFF, BRYAN REYHANI, and       )
RYAN SILVERMAN,                  )
                                 )
              Defendants,        )
and                              )
                                 )
FXCM, INC.,                      )
                                 )
              Nominal Defendant. )

                       MEMORANDUM OPINION

                      Date Submitted: June 12, 2017
                     Date Decided: September 29, 2017

Peter B. Andrews, Craig J. Springer, David M. Sborz, of ANDREWS & SPRINGER,
LLC, Wilmington, Delaware; OF COUNSEL: Joseph E. White, III, Jorge A.
Amador, Jonathan M. Stein, Adam Warden, of SAXENA WHITE, P.A., Boca Raton,
Florida, Attorneys for Plaintiff.

Kenneth J. Nachbar, Thomas P. Will, of MORRIS, NICHOLS, ARSHT &
TUNNELL LLP, Wilmington, Delaware; OF COUNSEL: Paul R. Bessette, Israel
Dahan, of KING & SPALDING LLP, New York, New York; Michael J. Biles, Tyler
W. Highful, S. Saliya Subasinghe, of KING & SPALDING LLP, Austin, Texas,
Attorneys for Defendants and Nominal Defendant.
GLASSCOCK, Vice Chancellor
      This matter is before me on a Motion to Dismiss an action brought by a

stockholder, purportedly derivatively for the benefit of his corporation, nominal

defendant FXCM, Inc. (“FXCM” or “the Company”). FXCM is a foreign exchange

(“FX”) broker. The cause of action advanced is a suit against FXCM directors for

losses associated with the so-called “Flash Crash” in the value of the euro relative to

the Swiss franc, which happened when the Swiss unexpectedly decoupled the two

currencies. As this Court has had numerous opportunities to explain, a chose in

action is a corporate asset, subject, in our model, to the control of the corporation’s

directors. A stockholder who believes the asset is being poorly deployed must make

a demand on the board; only if the board breaches its duty in response may the

stockholder pursue the matter derivatively. The exception is where an impediment

renders a majority of directors unable to bring their business judgment to bear on

behalf of the corporation to consider the issue; in that case, demand is excused and

the stockholder may litigate in the corporate interest. Under the facts here, the

Plaintiff contends that demand is excused.

      The bulk of the Company’s business, at the time at issue, involved retail FX

trades. With retail customers, FXCM employed an agency trading model under

which the Company made, on customer order, offsetting currency trades in the FX

market on behalf of the customer. That is, the Company made a purchase in the

market, and made a corresponding sale to the customer. As is industry practice,

                                          1
customers’ trades were highly leveraged. Where the customer’s position took a loss

as a result of trading activity, it was FXCM’s policy, in light of which it marketed

its services, to retain the investment which the customer had paid, but not to pursue

the customer for additional amounts owed FXCM; in other words, FXCM did the

offsetting trades, the customer made an up-front and leveraged investment payment

to FXCM, and any losses above that amount were retained by FXCM. FXCM sought

to avoid such situations by selling out the customer’s interest when losses beyond

investment threatened. This it was generally able to do when the market was

relatively stable and liquid.

      FXCM’s policy, however, entailed both business and regulatory risk. The

business risk involved situations where the market became neither stable nor liquid;

where customer’s accounts were on the wrong side of such a market, FXCM could

find itself liable for the large potential losses in excess of its customers’ investments.

Such a situation occurred when the euro lost value in the Flash Crash. FXCM

suffered large losses, as a result of which it was required to borrow funds under

onerous conditions, and in light of which the board took a number of actions. These

losses and actions are the main focus of the Plaintiff’s Complaint. Since I conclude

that a majority of the directors were independent and disinterested, and because I

find no likelihood that they face a substantial threat of liability for what were (costly)

business decisions, I conclude that the Plaintiff has failed to demonstrate that the

                                            2
directors’ ability to exercise business judgment is impaired, and demand is not

excused with respect to these allegations.       The exception to this is the loan

transaction itself, with respect to which a majority of the directors were not

independent and disinterested: with respect to that transaction, demand is excused,

and the Motion to Dismiss must be denied.

      The more difficult issue here involves the legal and regulatory risk engendered

by FXCM’s business model. The Complaint points out that, at least since the time

of the 2010 Dodd-Frank reforms, 17 C.F.R. § 5.16 (“Regulation 5.16”) has

prohibited FX traders from representing that they will limit clients’ trading losses.

According to the Plaintiff, that was exactly what FXCM was doing when it informed

customers that, in certain circumstances, it would not pursue their losses beyond

their initial investment. He notes that, during the pendency of this matter, the

Commodity Futures Trading Commission (“CFTC”) has brought an action alleging

precisely that. The Defendants argue that the Plaintiff’s reading is but one way to

interpret the Regulation. They note that the Plaintiff has failed to allege that, up to

the time pertinent, the CFTC had ever publicly taken a position that the model used

by FXCM was in violation of Regulation 5.16, much less that the directors were

aware of such. They point out that the Complaint is silent as to any “red flag,”

warning, or report to the directors suggesting that FXCM was not in compliance with

the Regulation. The allegations of the Complaint are limited to these: First, the

                                          3
directors were aware of Regulation 5.16, as demonstrated by the Company’s Form

10-K disclosures, which, in each year pertinent, referenced Regulation 5.16. The

Complaint notes that in these Form 10-Ks, the Company discloses as a risk that

CFTC rules forbid making guarantees against loss to retail FX customers. Second,

the directors were aware of the Company’s advertised policy not to pursue customer

losses beyond investment, a matter that the Defendants do not seriously contest. And

third, that nonetheless the directors failed to ensure that the Company was brought

into compliance with the Regulation.

         Where directors knowingly cause or permit a Delaware corporation to violate

positive law, they have acted in bad faith, and are liable to the corporation for

resulting damages. Where, as here, the directors serve with the benefit of an

exculpatory clause, they are not liable for non-compliance with law resulting from

their negligence or gross negligence, however; only where they knowingly cause the

violation, or knowingly ignore a duty to act, is bad faith in violation of the duty of

loyalty invoked, leading to liability. Demand will be excused only where the facts

alleged, together with reasonable inferences therefrom, if true make it substantially

likely that any illegality on the part of the Company arose from the directors’ bad

faith.

         Typically, directors are not charged with preventing illegal actions by

company employees unless certain “red flags” make it inescapable that the board

                                          4
acted with illegal intent, or in bad faith ignored a duty to act to prevent a violation.

The pleading standard for such scienter on the part of directors is high. This case

involves no notice to the Board by legal advisors that Company policy—soliciting

customers by touting limited risk—was illegal, and the Complaint is silent regarding

other such red flags. However, the Regulation itself is so clear on its face that,

drawing the appropriate plaintiff-friendly inferences, I find it reasonably likely that

the directors knowingly condoned illegal behavior. Of course, whether that high

burden is substantively met awaits a developed record, and circumstances not

apparent on the face of the pleadings may well show lack of bad faith. The question

here, however, is whether this Board could bring its independent business judgment

to bear on behalf of the corporate interest in responding to a liability demand. I find

that the substantial likelihood of liability faced by the Defendants prevents such an

exercise of business judgment, and demand on this cause of action is excused. A

more detailed statement of the facts and my analysis follows.




                                           5
                                   I. BACKGROUND1

       A. The Parties

       Plaintiff Brett Kandell was a stockholder of nominal defendant FXCM, Inc.

at all times relevant to this case and maintains his ownership interest today.2 The

Plaintiff seeks to bring this action derivatively on behalf of FXCM. 3 FXCM, a

Delaware corporation, “is an online provider of foreign exchange trading and related

services.”4

       Defendant Dror Niv has served as Chairman of the FXCM Board of Directors

since 2010, when FXCM went public.5 Beginning in 1999, Niv was also a director

for FXCM’s predecessor FXCM Holdings, LLC.6 Niv was one of the founders of

FXCM, and he has served as the Company’s CEO since 1999.7

       Defendants William Ahdout, Kenneth Grossman, David Sakhai, and Eduard

Yusupov were also founding partners of FXCM.8 Like Niv, these defendants have


1
  The facts, drawn from the Plaintiff’s Verified Third Amended Shareholder Derivative Complaint
(“Complaint” or “Third Amended Complaint”), from documents incorporated by reference
therein, and from matters of which I may take judicial notice, are presumed true for purposes of
evaluating the Defendants’ Motion to Dismiss.
2
  Compl. ¶¶ 11, 159.
3
  Id. ¶ 158.
4
  Id. ¶ 12. On February 21, 2017, FXCM announced, among other things, that it would change its
name to “Global Brokerage, Inc.” Defs.’ Resp. in Opp’n to Pl.’s Mot. for Leave to File a
Supplement to the Compl. 9 n.2. Nonetheless, I refer to the Company as FXCM throughout this
Memorandum Opinion, and I do not take note of other changes that have occurred at FXCM since
the filing of the Plaintiff’s Complaint.
5
  Compl. ¶ 13.
6
  Id.
7
  Id.
8
  Id. ¶¶ 14–17.
                                               6
been members of FXCM’s Board since 2010 and began serving on the Holdings

Board in 1999.9 Ahdout serves as “FXCM’s Chief Dealer and is a Managing

Director.”10 Grossman is also a Managing Director at FXCM.11 Sakhai serves as

FXCM’s COO,12 and Yusupov “is FXCM’s Global Head of Dealing” in addition to

serving as a Managing Director.13

        Defendant James G. Brown has been a member of the FXCM Board since

2010 and began serving on the Holdings Board in 2008.14 “Brown is the ‘Presiding

Independent Director’ and is a member of the Board’s Audit Committee,

Compensation       Committee,   and   Corporate   Governance   and   Nominating

Committee.”15 Defendant Robin Davis has served on the FXCM Board since 2010

and is a member of the Board’s Audit Committee.16 Defendant Arthur Gruen has

been an FXCM Board member since 2010 and serves on the Audit and

Compensation Committees.17 Gruen is the founder and Vice President of Broker

Online Exchange (“BOX”), a startup founded in 2013.18 BOX “incurred net losses




9
  Id.
10
   Id. ¶ 14.
11
   Id. ¶ 15.
12
   Id. ¶ 16.
13
   Id. ¶ 17.
14
   Id. ¶ 18.
15
   Id.
16
   Id. ¶ 19.
17
   Id. ¶ 21.
18
   Id. ¶ 178(b).
                                        7
of $17,498.00 and $25,542.53, in 2013 and 2014, respectively.” 19 Defendants Eric

LeGoff and Ryan Silverman have served on FXCM’s Board since 2010.20 Silverman

chairs the Board’s Corporate Governance and Nominating Committee, and he is the

CEO of “MSR Solutions, Inc., a financial consulting firm.”21 The Complaint alleges

on information and belief that “MSR Solution, Inc.’s annual revenue is $130,000.”22

        Defendant Perry Fish was a member of FXCM’s Board from 2010 to February

1, 2016.23 During that time, Fish chaired the Board’s Compensation Committee and

served on the Corporate Governance and Nominating Committee.24 Fish worked as

a lawyer “at the Law Offices of Perry Gary Fish” until 2014, and FXCM’s 2015

annual proxy “does not indicate that Fish has been employed since 2014.”25

Defendant Bryan Reyhani has served on FXCM’s Board since February 1, 2016.26

        With the exception of Reyhani, all of these defendants signed FXCM’s annual

reports (filed on SEC Form 10-K) from fiscal year 2010 through fiscal year 2015.27

FXCM’s 2014 annual proxy revealed that Niv, Sakhai, Ahdout, Yusupov, and

Grossman held “over 27.7% of the Company’s voting power through their stock



19
   Id.
20
   Id. ¶¶ 22, 24.
21
   Id. ¶¶ 24, 178(c).
22
   Id. ¶ 178(c).
23
   Id. ¶ 20.
24
   Id.
25
   Id. ¶ 178(a).
26
   Id. ¶ 23.
27
   Id. ¶¶ 13–22, 24.
                                         8
ownership.”28 According to the 2014 annual proxy, the Defendants collectively held

29.9% of FXCM’s voting power, “making them the single largest group of FXCM

shareholders.”29 And from fiscal year 2011 through fiscal year 2015, Gruen, Brown,

Fish, LeGoff, Silverman, and David each received $150,000 in annual director

compensation.30

        B. Factual Overview

                1. FXCM’s Business Model

        FXCM, which was founded in 1999 and went public in 2010, “provides online

foreign exchange . . . trading services to nearly 200,000 customers globally.” 31

FXCM’s business is divided into two primary components: “retail trading, in which

its customers are individual investors trading on their own personal accounts, and

institutional trading, where the Company offers foreign exchange trading services to

banks, hedge funds and other institutional customers.”32 FXCM obtains most of its

profits from its retail segment, “with 76.6% of its 2014 trading revenues derived

from retail and 23.4% from institutional customers.”33 Indeed, FXCM is the largest

FX broker for retail customers in the United States.34 Despite FXCM’s prominence



28
   Id. ¶ 63.
29
   Id. ¶ 26.
30
   Id. ¶ 178.
31
   Id. ¶ 28.
32
   Id.
33
   Id.
34
   Id.
                                           9
in the U.S. market, most of its “retail customer trading volume was derived from

customers residing outside of the U.S., according to FXCM’s . . . Form 10-K filed

with the SEC on March 16, 2015.”35

       FXCM’s trading platform employs what it describes as an “agency model” to

carry out trades.36 FXCM provided the following description of its agency model in

its 2013 Form 10-K:

       Our agency model is fundamental to our core business philosophy because we
       believe that it aligns our interests with those of our customers and reduces our
       risks. In the agency model, when our customer executes a trade on the best
       price quotation offered by our FX market makers, we act as a credit
       intermediary, or riskless principal, simultaneously entering into offsetting
       trades with both the customer and the FX market maker. We earn trading fees
       and commissions by adding a markup to the price provided by the FX market
       makers.37

FXCM allows its customers to trade currency pairs, purchasing one currency at the

same time as they sell another.38 According to the Complaint, FXCM maintained a

“policy of extending massive amounts of leverage to its customers,”39 “with leverage

of as much as 50:1 extended to U.S. customers and 200:1 for overseas customers.”40

FXCM’s leverage policy stemmed from the nature of FX markets, in which “daily




35
   Id. ¶ 30.
36
   Id. ¶ 33.
37
   Id. (emphasis and footnote omitted).
38
   Id. ¶ 32.
39
   Id. ¶ 34.
40
   Id. ¶ 2.
                                          10
currency fluctuations are usually very small.”41 Leverage therefore enables FX

traders “to increase the value of potential currency movements.”42

        FXCM maintains several policies designed to reduce its customers’ risk of

incurring trading losses. It touts its “margin-watcher feature,” which purports to

“automatically close[] out open positions if a customer’s account is at risk of going

into a negative balance as a result of a trading position losing value and reaching the

minimum margin threshold.”43 The Complaint notes that “market conditions” may

prevent FXCM from closing out a customer’s account before she is at risk of

suffering losses greater than her margin.44 When that happens, “FXCM’s stated

policy [as set out in the Company’s Form 10-Ks] is ‘generally not to pursue claims

for negative equity against our customers.’”45 In other words, where FXCM is

unable to close out a customer account before its losses exceed the amount the

customer invested, FXCM, and not the customer, takes the loss.

        FXCM’s policy regarding customer losses is embodied in its Client

Agreement, which customers must sign before they open an account. 46 The Client

Agreement provides, among other things, that “[if] the Client incurs a negative

balance through trading activity, the Client should inform FXCM’s trade audit team.


41
   Id. ¶ 30.
42
   Id.
43
   Id. ¶ 35.
44
   Id.
45
   Id.
46
   Id. ¶ 43.
                                          11
FXCM will evaluate the inquiry and credit the Client’s Account with the amount of

the negative balance where the debit was due to trading activity.”47 The Client

Agreement clarifies that this policy does not apply in various situations, including

“in the case of a force majeure event,” or where “FXCM determines, in its sole and

absolute discretion, that the negative balance is unrelated to the Client’s trading

activity.”48

       The Complaint points to a bevy of FXCM materials designed to draw attention

to the Company’s policy regarding customer losses. In December 2014, FXCM’s

U.S. website stated that while “account equity” may “become[] negative,” “FXCM

will not hold traders responsible for deficit balances in this scenario.”49 And from

March 2011 to March 2015, FXCM’s U.S. website answered in the negative the

following questions: “Is there a debit balance risk? Can I lose more money than I

deposit?”50 The site elaborated that FXCM “guarantee[s] you can never pay a debit

balance. One of the greatest concerns traders have about leverage is that a sizable

loss could result in owing money to their broker. At FXCM, your maximum risk of

loss is limited by the amount in your account.”51 A July 6, 2010 FXCM Australia

press release noted that “[u]nlike margin trading with other providers, FXCM



47
   Id.
48
   Id.
49
   Id. ¶ 47 (emphasis omitted).
50
   Id. ¶ 48 (emphasis omitted).
51
   Id. (emphasis omitted).
                                        12
guarantees that you will never have to pay a deficit balance as a result of trading!”52

FXCM also used social media to promote its policy regarding customer losses. For

example, on June 30, 2011, FXCM UK’s Twitter page stated that “FXCM traders

have peace of mind knowing that they are not responsible for account deficit

balances as a result of trading.”53 And a now-removed YouTube video posted on

FXCM’s YouTube channel touted that “customers would ‘NEVER OWE A

DEFICIT AS A RESULT OF TRADING.’”54

               2. CTFC Regulations and FXCM

       The CFTC regulates FXCM.55 The Complaint alleges in conclusory fashion

that “[s]ince at least 1981, the CFTC has prohibited companies like FXCM from

offering guarantees or limiting customer losses.”56 The Plaintiff, however, does not

quote the language of this prohibition.57 Instead, he points to Regulation 5.16, which

the CFTC adopted in September 2010, as part of the Dodd-Frank reforms.58 Under

Regulation 5.16,

       a) No retail foreign exchange dealer, futures commission merchant or
       introducing broker may in any way represent that it will, with respect
       to any retail foreign exchange transaction in any account carried by a


52
   Id. ¶ 49.
53
   Id. ¶ 53.
54
   Id. ¶ 54.
55
   Id. ¶ 38.
56
   Id.
57
   It appears that the Plaintiff is referring to 17 C.F.R. § 1.56, which contains prohibitions similar
to those found in Regulation 5.16.
58
   Compl. ¶ 38.
                                                 13
       retail foreign exchange dealer or futures commission merchant for or
       on behalf of any person:
               (1) Guarantee such person against loss;
               (2) Limit the loss of such person; or
               (3) Not call for or attempt to collect security deposits, margin, or
               other deposits as established for retail forex customers.59

According to the CFTC, the purpose of adopting Regulation 5.16 was threefold.

First, Regulation 5.16 provides protection for FX companies in the event of extreme

volatility in the currency market.60 Second, Regulation 5.16 helps ensure that FX

companies remain financially viable, because a firm that agrees to eat its customers’

losses is at risk of undercapitalization, which may ultimately necessitate

bankruptcy.61 Third, the CFTC was concerned that policies guaranteeing or limiting

customer losses had often gone hand in hand with illegal conduct on the part of FX

companies.62

       FXCM’s business model—“highly leveraged forex trading” combined with a

policy that customers, typically, would not bear losses beyond what they deposited

into their account—allegedly led to significant increases in the Company’s retail

trading volume.63 To support this assertion, the Plaintiff points out that “retail

customer trading volume for December 2014 ‘was 61% higher than December




59
   17 C.F.R. § 5.16.
60
   Compl. ¶ 39.
61
   Id. ¶ 40.
62
   Id. ¶ 41.
63
   Id. ¶ 44.
                                           14
2013.’”64 The Plaintiff charges that this business strategy, despite increasing profits

for the Company, was premised on violations of Regulation 5.16. According to the

Complaint, “the Individual Defendants ignored Regulation 5.16 in order to attract

customers lured by the guarantee that they would never be financially responsible

for a negative balance incurred on their account.”65

        The Complaint alleges that the Defendants “could not help but know about

FXCM’s violations of Regulation 5.16 due to its scope and pervasiveness at the

Company.”66 Specifically, the Complaint asserts that because “Regulation 5.16 was

part of a significant overhaul of the CFTC’s regulations in connection with the

highly publicized Dodd-Frank Act in 2010, the Company’s Board knew or should

have known that the Company’s zero debit policy was a violation of Regulation

5.16.”67 The Complaint also alleges that the Defendants were aware of FXCM’s

purported violations of Regulation 5.16 because of the Company’s “extensive

marketing materials and its client agreements offering guarantees to customers.”68

Finally, the Complaint attempts to establish the Defendants’ knowledge of

impropriety by pointing to FXCM’s SEC filings, which refer to Regulation 5.16.69

For instance, FXCM’s Form 10-Ks for 2010 to 2014 noted that one of the risks


64
   Id.
65
   Id. ¶ 43.
66
   Id. ¶ 45.
67
   Id.
68
   Id. ¶ 46.
69
   Id. ¶ 55.
                                          15
facing the Company involved the CFTC’s adoption of “final rules which, among

other things, ‘prohibit the making of guarantees against loss to retail FX

customers.’”70

       On August 18, 2016, the CFTC brought a complaint against FXCM, alleging

that it had “improperly guarantee[d] its customers against loss, limit[ed] the loss of

customers, or not call[ed] for or attempt[ed] to collect security deposits, margin, or

other deposits of customers.”71 “The CFTC . . . [sought] damages in the billions of

dollars as a result of FXCM’s violations of Regulation 5.16.”72 In February 2017,

FXCM entered into a consent order with the CFTC in which it agreed to pay a

$650,000 fine for, among other things, violations of Regulation 5.16 resulting from

its no-debit policy.73 FXCM did not admit or deny the consent order’s allegations

or conclusions,74 and the order provides scant factual detail regarding the Company’s

implementation of the no-debit policy.                It states that “FXCM represented to

customers that it would limit customer losses . . . . by advertising that if the customer

incurred a negative balance through trading activity FXCM would credit the

customer account with the amount of the negative balance.”75 The consent order


70
   Id. The Plaintiff alleges that Niv wrote several letters to the CFTC in 2010 in opposition to
some of the proposed regulations. Id. ¶ 45. But the Plaintiff does not assert that any of these letters
referred to Regulation 5.16.
71
   Id. ¶ 58.
72
   Id.
73
   Consent Order ¶¶ 37–38, 40.
74
   Id. ¶ 11.
75
   Id. ¶ 31.
                                                 16
also notes that the no-debit policy “was memorialized in FXCM’s customer account

opening documents.”76

              3. The “Flash Crash”

       From September 2011 to January 15, 2015, the Swiss National Bank (“SNB”)

maintained a policy of pegging the Swiss franc to the euro.77 During this time, the

SNB worked to prevent the Swiss franc from “appreciat[ing] beyond the level of 1.2

euros per franc.”78 The SNB adopted this policy “during the Eurozone debt crisis .

. . , when, in response to a weakening euro and fears of the euro’s ongoing viability

as a common currency, an influx of money flowed into Switzerland, creating upward

pressure on the Swiss franc.”79 The introduction of this currency peg caused what

the Complaint describes as “the largest price swing of any ‘G-10’ currency in recent

memory (other than when the peg was removed on January 15, 2015), with the Swiss

franc falling 8.8% against the euro on the day of the announcement.”80 Nevertheless,

as a result of the SNB’s efforts, the EUR/CHF currency pair remained stable for

several years, and FX traders took “large positions in the pair.”81 FXCM, for its part,

promoted trading in the EUR/CHF pair through a Company-owned website and




76
   Id.
77
   Compl. ¶¶ 65, 68.
78
   Id. ¶ 65.
79
   Id.
80
   Id.
81
   Id. ¶ 66.
                                          17
online videos.82 At least two of FXCM’s competitors—Gain Capital Group and

Saxo Bank—saw a potential downside in the growth of trading positions that were

long on EUR and short on CHF.83 As a result, these two companies “increased their

margin requirements for the pair.”84 FXCM, however, took no such precautionary

measures.85

       In response to concerns that the European Central Bank was about to “creat[e]

downward pressure on the euro” via “pumping in money through bond purchases,”

the SNB “announced on January 15, 2015 that it would allow its currency to float

freely against the euro.”86 The announcement led to extreme volatility in the

EUR/CHF currency pair, with the Swiss franc appreciating rapidly.87 The franc rose

“more than 41% against the euro, eventually settling at an 18% rise over the course

of the day.”88 As a result of this volatility, FX markets were drained of liquidity,

effectively preventing FXCM from executing stop orders or margin calls until

approximately forty-five minutes after the announcement.89 But “[b]y that time,

customers on the wrong side of the EUR/CHF pair [that is, long on EUR, short on




82
   Id.
83
   Id. ¶ 67.
84
   Id.
85
   Id.
86
   Id. ¶ 68.
87
   Id. ¶ 69.
88
   Id. (emphasis added).
89
   Id.
                                         18
CHF] had locked in significant losses.”90 Many of these customers incurred negative

account balances, and their losses were compounded by their reliance on leverage in

their trading strategies.91

        The Flash Crash proved catastrophic for FXCM. On the evening of January

15, FXCM put out a press release announcing that FXCM’s customers had suffered

large losses, leading to “negative equity balances owed to FXCM of approximately

$225 million,” a figure later revised upward to $276 million.92 FXCM also stated

that these negative balances potentially put it “in breach of certain regulatory capital

requirements.”93 FXCM was hampered in its ability to collect on these accounts

because of its policy regarding customer losses, which put “the Company . . . on the

hook for these losses.”94 The Complaint describes in great detail the FXCM Board’s

response to these events, to which I now turn.

                4. The Board’s Response to the Flash Crash

        The FXCM board first met to address the Flash Crash at 3:00 pm on January

15, 2015.95 Niv gave background on the events of the day, and noted that FXCM

customers had suffered $200 million in losses that the Company may not be able to




90
   Id.
91
   Id.
92
   Id. ¶ 71 n.37.
93
   Id. ¶ 71.
94
   Id. ¶ 2.
95
   Id. ¶ 79.
                                          19
collect.96 Niv also pointed out that FXCM might be breaching its revolving credit

agreement, so that the Company “had to raise a total of at least $250 million.”97

According to Niv, FXCM’s regulators “threatened a ‘temporary’ suspension of the

Company’s operations if sufficient funds were not raised by the next morning.”98

Niv told the Board that, to address this crisis, FXCM had sought the services of UBS,

which “only advised FXCM in its capacity as placement agent in exploring financing

alternatives, and did not advise the Company on debt financing.”99 Niv also

suggested that “as a backup plan,” FXCM could obtain capital from its

competitors.100

        The FXCM board met again on the evening of January 15.101 Niv gave an

update on the situation, describing UBS’s ongoing efforts to obtain financing for the

Company.102 Niv mentioned that Jeffries Group LLC, “an investment banking

subsidiary of the holding company Leucadia,” was in FXCM’s offices and was

considering providing financing to the Company.103 At this meeting, Niv stated that

a suspension of trading “would not necessarily put the Company out of business but




96
   Id.
97
   Id.
98
   Id. ¶ 82.
99
   Id. ¶ 81.
100
    Id.
101
    Id. ¶ 84.
102
    Id.
103
    Id.
                                         20
could cause a dramatic reduction in the value of the Company.”104 The Plaintiff

emphasizes that, while the Board received updates and information from Niv about

the situation and potential next steps, the Board did not obtain “a financial advisor

to counsel the directors on issues that were essential to the Company’s very existence

as a going concern.”105 Specifically, neither UBS nor any other investment bank

provided advice as to debt financing or the loan FXCM eventually obtained from

Leucadia.106

        The next morning, at 8:30 am, the Board convened for a third time. 107 Niv

informed the Board that “regulators from the CFTC and the [National Futures

Association] were in the Company’s offices and had threatened to shut down the

Company’s operations if FXCM did not immediately receive sufficient capital to

stay in regulatory compliance.”108 Robert Lande, FXCM’s CFO, mentioned that the

Company was working on a deal with Leucadia in which “Leucadia would extend a

two year secured loan of up to $300 million . . . to FXCM, with an interest rate of

10%, increasing 1% per quarter.”109 At this time, FXCM had contacted several other

parties, but none “were willing to execute a transaction within the time frame




104
    Id. ¶ 85.
105
    Id.
106
    Id. ¶ 168.
107
    Id. ¶ 86.
108
    Id.
109
    Id.
                                         21
demanded by the regulators.”110 Niv reiterated his view that a shutdown would wipe

out FXCM’s enterprise value, but that “some value could be preserved in a

transaction prior to a shutdown.”111

        The Board met yet again at 11:15 am, and the directors learned that the

regulators would force the Company into liquidation if it did not obtain enough

capital to bring it into regulatory compliance by noon.112 Niv then told the Board

that the loan offered by Leucadia was FXCM’s only option if it was to continue to

operate.113 The Complaint alleges that while UBS had been unable to secure equity

financing from other parties with whom it or the Company had negotiated, “UBS

and the Company failed to propose a loan from these parties similar to the Leucadia

Loan, but with better terms for the Company.”114

        At this meeting, Niv also set out the terms of the proposed Leucadia deal.115

In exchange for loaning FXCM $300 million, Leucadia would receive interest at the

rate of 10% per annum, increasing by 1.5% every quarter.116 The loan was set to

mature in two years, and after repayment, “net proceeds of asset sales, as well as

certain other distributions from the operating subsidiaries, would be split, with the



110
    Id. ¶ 87.
111
    Id. ¶ 88.
112
    Id. ¶ 89.
113
    Id.
114
    Id.
115
    Id. ¶ 90.
116
    Id.
                                          22
Company receiving 25% and Jefferies/Leucadia receiving 75%.”117 Further, after

three calendar years, Leucadia could force a sale of the Company.118 After Niv

explained these terms, Brown, the “Presiding Independent Director” of FXCM, said

he was interested in “personally participating in the transaction.”119 Niv then stated

his belief that FXCM would likely enter receivership if the Board did not approve

the loan from Leucadia, “and that this would be a worse option for shareholders, as

customers would lose money (because not all customer funds are segregated) and

there would be substantial litigation and potential governmental issues.”120 The

Plaintiff downplays the urgency of the situation facing the Board, pointing to CFTC

Regulation 5.7, which gives companies a ten-day extension if they can demonstrate

that they are able to comply with capital requirements.121         According to the

Complaint, the Board never sought an extension under Regulation 5.7, though the

Plaintiff admits that Niv informed the directors of his view that the regulators would

not give the Company additional time to explore alternative transactions.122 All the

directors (save Brown, who abstained) voted to approve the Leucadia deal.123




117
    Id.
118
    Id.
119
    Id. ¶ 91.
120
    Id. ¶ 92.
121
    Id.
122
    Id. ¶ 92 n.41.
123
    Id. ¶ 93.
                                         23
        Shortly after the preliminary vote, it emerged that Steven Cohen Asset

Management (“SACAM”) was interested in offering a more advantageous deal to

FXCM than that proposed by Leucadia.124 But this deal later fell through because

Steven Cohen, SACAM’s head, could not obtain from the regulators “certain

assurances he was seeking due to prior regulatory violations by his firm.” 125

        The final board meeting in the immediate aftermath of the Flash Crash took

place approximately four hours later.126 At 3:05 pm, right before the Board was set

to approve the Leucadia loan, CFTC regulators entered the room and announced that

“if the Board did not approve the transaction at that very moment, they would shut

down the Company’s operations immediately and force FXCM into liquidation.”127

The Board (again with the exception of the abstaining Brown) then approved the

transaction.128 Despite the compressed timeframe within which the Board was

forced to act, the Plaintiff faults the Board for failing to form “a special committee

of independent directors to cleanse the process of conflicts of interest.” 129 As an

example of such a conflict of interest, the Plaintiff points out that five out of eleven




124
    Id.
125
    Id.
126
    Id. ¶ 94.
127
    Id.
128
    Id.
129
    Id. ¶ 95.
                                          24
FXCM board members were insiders who were “not listed as ‘independent’ in the

Company’s annual proxies.”130

                5. The Aftermath

        On January 19, 2015, FXCM issued a press release announcing the Leucadia

loan.131 It described the terms of the loan, which included, as noted above, an initial

interest rate of 10% per annum that would increase by 1.5% each quarter the loan

remained outstanding until the cap of 20.5% was reached, and an agreement that

FXCM would pay Leucadia a share of the proceeds resulting from certain

transactions, including a sale of assets, dividends or distributions, and the sale of the

Company.132 Under this value-sharing agreement, once the Leucadia loan and

associated fees were paid off, Leucadia would be entitled to 50% of the next $350

million of sale proceeds, dividends, or distributions, 90% of the “[n]ext amount

equal to 2 times the balance outstanding on the term loan and fees as of April 16,

2015, such amount not to be less than $500 million or more than $680 million,” and

60% of “[a]ll aggregate amounts thereafter.”133 The loan also contained several

restrictive covenants limiting FXCM’s ability to enter mergers and other significant




130
    Id.
131
    Id. ¶ 97.
132
    Id.
133
    Id.
                                           25
transactions.134 And, as discussed above, Leucadia held the right to force a sale of

FXCM after three years.135

       According to the Complaint, market reaction to the Leucadia deal was

negative. The Plaintiff points out that on January 15, 2015, FXCM stock closed at

$12.63, and when trading in the stock began again on January 20, FXCM stock

opened at $1.58 and closed at $1.60.136 The Complaint also quotes financial analysts

who expressed the view that the Leucadia loan had significantly reduced the value

of FXCM stock.137 As a result of FXCM’s inability to pay down the Leucadia loan

with revenue from its businesses, the Company has had to sell several of its

subsidiaries.138 Another consequence of the Flash Crash was that FXCM “increased

margin requirements for global clients who trade currencies.”139         FXCM also

stopped allowing customers to trade fourteen currency pairs that it deemed too

risky.140

       FXCM implemented several other changes in the wake of the Flash Crash and

the Leucadia loan. On January 30, 2015, “the Board announced that it had adopted

a Stockholder Rights Plan [“Rights Plan”] . . . , declaring a dividend distribution of



134
    Id.
135
    Id.
136
    Id. ¶ 99.
137
    Id. ¶¶ 101–03.
138
    Id. ¶ 104.
139
    Id. ¶ 106.
140
    Id.
                                         26
one right on each outstanding share of the Company’s Class A common stock.”141

The Rights Plan had a 10% ownership trigger, and when UBS made a presentation

to FXCM on the Plan, it noted that “only 19% of rights plans then in-effect by S&P

600 companies employed ownership triggers of less than 15%.”142 FXCM’s press

release announcing the Plan stated that it was “designed to reduce the likelihood that

any person or group would gain control of the Company by open market

accumulation or other coercive takeover tactics without paying a control premium

for all shares.”143 Approximately one year later, FXCM amended the Rights Plan to

lower the ownership trigger to 4.9%.144 According to the Complaint, FXCM adopted

and amended the Rights Plan even though the Company “had neither a history of

contentious shareholder activism nor any implicit threat of action by outside activist

investors.”145

        In March 2015, FXCM announced that Niv, Sakhai, Adhout, and Yusupov

had entered into new severance agreements with the Company.146 If these executives

were fired, they “would be entitled to[, among other things,] (1) two times their

annual base salary on the termination date, [and] (2) their annual target bonus (which




141
    Id. ¶ 107.
142
    Id. ¶ 109 n.48.
143
    Id. ¶ 107.
144
    Id. ¶ 110.
145
    Id. ¶ 111.
146
    Id. ¶ 113.
                                         27
is 200% of the executive’s annual base salary).”147 Each of these executives received

an annual base salary of $800,000.148 Under their previous severance agreements,

they were entitled only to twice their base salary, so that the new agreements

“add[ed] an additional $1.6 million (double their annual base salary) to each

executive’s severance package.”149 Moreover, Niv, Sakhai, Adhout, Yusupov, and

Lande (FXCM’s CFO) received yearly incentive bonus plans tied to “EBITDA

growth, repayments of the Leucadia Loan, and an ‘Individual Objective Portion.’”150

The result of this new incentive plan was that Niv, Sakhai, Ahdout, and Yusupov

saw their compensation more than double between 2014 and 2015.151 The Plaintiff

takes issue with the decision to tie bonuses to repayment of the Leucadia loan,

describing it as a way of “accomplishing a goal that was already contractually

mandated.”152 The Plaintiff also attacks Niv’s compensation in 2015, alleging that

he “is the second highest paid CEO in his peer group . . . despite FXCM having the

lowest market capitalization, fifth lowest total assets, third lowest total revenues, and

the worst earnings in its peer group.”153




147
    Id.
148
    Id.
149
    Id. ¶ 115 (emphasis omitted).
150
    Id. ¶ 117.
151
    Id.
152
    Id. ¶ 118.
153
    Id. ¶ 121.
                                            28
        In April 2016, FXCM amended the bonus plans to remove the Leucadia loan

component of the bonus calculation and increase the EBITDA portion. 154 The

amendment also “reduce[d] the 2016 EBITDA target from $80.5 million to $40

million—more than a 50% decrease despite a 100% increase in its weighted

significance for the bonus calculation.”155 The Plaintiff alleges that the Board

enacted this amendment because it would enhance these executives’ ability to obtain

bonuses.156 To support this allegation, the Plaintiff points out that while “FXCM’s

adjusted EBITDA in 2013 was approximately $158 million and in 2014 was

approximately $107 million, under the amended Annual Incentive Bonus Plan the

adjusted EBITDA target for 2015 is only $70 million, and in 2016 is only $40

million.”157

        On March 10, 2016, FXCM announced that it had entered a memorandum of

understanding (“MOU”) with Leucadia to amend the Leucadia loan.158 The Plaintiff

emphasizes that in exchange for giving FXCM an additional year to pay off the loan,

“Leucadia will acquire 49.9% common membership interest in the newly named

FXCM Group.”159 The MOU also modified the value-sharing schedule discussed

above; now, FXCM management is “guaranteed between 10% and 14% of the post-


154
    Id. ¶ 123.
155
    Id.
156
    Id. ¶ 124.
157
    Id.
158
    Id. ¶ 126.
159
    Id. ¶ 128.
                                        29
loan proceeds.”160 More specifically, after the Leucadia loan is paid off, “FXCM

senior management will be entitled to receive $35 million of the first $350 million

in proceeds, $60 million of the next $500 million in proceeds, and 14% of the

Company’s proceeds for the indefinite future.”161 While “[t]he amendments were

expected to be completed by June 2016, . . . to date the MOU has not been

finalized.”162

       C. This Litigation

       The Plaintiff filed his initial complaint on December 15, 2015, and filed an

amended complaint on March 4, 2016. After the Plaintiff filed another amended

complaint on May 31, 2016, the Defendants moved to dismiss, whereupon the

Plaintiff filed the Complaint currently before the Court. The Complaint asserts six

counts against the Defendants. Count I alleges that the Defendants breached their

fiduciary duties of loyalty and care by allowing the Company to violate Regulation

5.16; approving the Leucadia loan, the severance agreements and bonus plans, and

the Rights Plan; failing to obtain the services of a financial advisor to opine on the

merits of the Leucadia loan or other debt financing options; and exposing the

Company to undue risk.163 Count II is brought against the insider defendants (Niv,




160
    Id. ¶ 129.
161
    Id. ¶ 131.
162
    Id. ¶ 126.
163
    Id. ¶¶ 192–96.
                                         30
Sakhai, Adhout, Yusupov, and Grossman) for breaching their fiduciary duties by

“caus[ing] the Company to enter into the Leucadia Loan and the MOU, despite the

fact that the terms of the Leucadia Loan were grossly unfair to the Company.” 164

Count III seeks indemnification and contribution from the Defendants in the event

that FXCM is found liable for conduct for which the Defendants are responsible.165

Counts IV and V allege that the Leucadia loan, the severance agreements and bonus

plans, and the MOU constituted a waste of corporate assets.166 Finally, Count VI

asserts that Niv, Sakhai, Adhout, and Yusupov were unjustly enriched as a result of

the severance agreements and bonus plans.167 As noted above, the Plaintiff seeks to

proceed derivatively on behalf of FXCM.168 The Plaintiff chose not to make a pre-

suit demand on the FXCM board, arguing that such demand would be futile.169

       The Defendants moved to dismiss the Complaint on October 17, 2016, and on

December 1, 2016, the Plaintiff moved to strike various materials relied on in the

Defendants’ motion papers. I heard oral argument on these motions on February 1,

2017. On February 13, 2017, the Plaintiff moved to file a supplement to his

Complaint based on a recent CFTC Order (“February CFTC Order”) that, among

other things, fined FXCM for failing to disclose that it retained a financial interest


164
    Id. ¶ 203.
165
    Id. ¶¶ 208–09.
166
    Id. ¶¶ 213–14, 219–20.
167
    Id. ¶ 224.
168
    Id. ¶ 158.
169
    Id. ¶ 161.
                                         31
in a market maker with which FXCM’s customers often traded.170 I heard oral

argument on that motion on May 17, 2017. After the parties indicated to me that no

further argument was needed, I considered the matter fully submitted on June 12,

2017. This Memorandum Opinion addresses the pending motions.171 I turn first to

the Motion to Dismiss.

                                        II. ANALYSIS

       A. The Motion to Dismiss

       The Defendants have moved to dismiss the Plaintiff’s Complaint under Court

of Chancery Rule 23.1 for failure to make a demand.172 The demand requirement is

an extension of the bedrock principle that “directors, rather than shareholders,

manage the business and affairs of the corporation.”173 Directors’ control over a

corporation embraces the disposition of its assets, including its choses in action.

Thus, under Rule 23.1, a derivative plaintiff must “allege with particularity the

efforts, if any, made by the plaintiff to obtain the action the plaintiff desires from the

directors or comparable authority and the reasons for the plaintiff’s failure to obtain




170
    More specifically, the CFTC announced that it intended to institute proceedings against FXCM
for the conduct just described, and before those proceedings began, FXCM agreed to, among other
things, pay a $7 million fine, stop violating the relevant laws, and withdraw from CFTC
registration. Feb. CFTC Order 1, 12–14. FXCM neither admitted nor denied the Order’s
allegations or conclusions. Id. at 1.
171
    Because I do not rely on any of the materials submitted by the Defendants to which the Plaintiff
objects, I need not decide the Plaintiff’s Motion to Strike.
172
    The Plaintiff has also moved to dismiss under Court of Chancery Rule 12(b)(6).
173
    Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984) (citing 8 Del. C. § 141(a)).
                                                32
the action or for not making the effort.”174 Where, as here, the plaintiff has failed to

make a pre-suit demand on the board, the Court must dismiss the complaint “unless

it alleges particularized facts showing that demand would have been futile.”175 The

plaintiff’s “pleadings must comply with stringent requirements of factual

particularity that differ substantially from the permissive notice pleadings governed

solely by Chancery Rule 8(a).”176

       This Court analyzes demand futility under the test set out in Rales v.

Blasband.177 Rales requires a derivative plaintiff to allege particularized facts

raising a reasonable doubt that, if a demand had been made, “the board of directors

could have properly exercised its independent and disinterested business judgment

in responding to [it].”178 Aronson v. Lewis addresses the subset of cases in which

the plaintiff is challenging an action taken by the current board.179 To establish

demand futility under Aronson, the plaintiff must allege particularized facts creating

a reasonable doubt that “the directors are disinterested and independent” or the

“challenged transaction was otherwise the product of a valid exercise of business




174
    Ct. Ch. R. 23.1(a).
175
    Ryan v. Gursahaney, 2015 WL 1915911, at *5 (Del. Ch. Apr. 28, 2015), aff’d, 128 A.3d 991
(Table) (Del. 2015).
176
    Brehm v. Eisner, 746 A.2d 244, 254 (Del. 2000).
177
    634 A.2d 927 (Del. 1993).
178
    Id. at 934.
179
    See id. at 933–34 (explaining that Aronson does not apply unless the plaintiff is challenging a
business decision by the board of directors that would be considering the demand).
                                               33
judgment.”180 The tests articulated in Aronson and Rales are “complementary

versions of the same inquiry.”181 That inquiry asks whether the board is capable of

exercising its business judgment in considering a demand.182 “Courts assess demand

futility on a claim-by-claim basis.”183

               1. The Leucadia Loan and the MOU

       Because the Plaintiff first challenged the Board’s decision to approve the

Leucadia loan in his original complaint, I must consider whether demand would have

been futile with respect to the Board as it was constituted when the initial complaint

was filed—that is, when it was composed of the same directors who approved the

Leucadia loan.184 At that time, eleven directors sat on FXCM’s Board: Niv, Ahdout,

Grossman, Sakhai, Yusupov, Brown, Davis, Fish, Gruen, LeGoff, and Silverman.185

Of those eleven, Niv, Ahdout, Grossman, Sakhai and Yusupov were corporate

officers as well as directors.186 The Defendants do not argue that these Company




180
    473 A.2d at 814.
181
    In re China Agritech, Inc. S’holder Derivative Litig., 2013 WL 2181514, at *16 (Del. Ch. May
21, 2013); see also David B. Shaev Profit Sharing Account v. Armstrong, 2006 WL 391931, at *4
(Del. Ch. Feb. 13, 2006) (“This court has held in the past that the Rales test, in reality, folds the
two-pronged Aronson test into one broader examination.”).
182
    In re Duke Energy Corp. Derivative Litig., 2016 WL 4543788, at *14 (Del. Ch. Aug. 31, 2016).
183
    Reiter ex rel. Capital One Fin. Corp. v. Fairbank, 2016 WL 6081823, at *6 (Del. Ch. Oct. 18,
2016).
184
    See Rales, 634 A.2d at 934 (instructing courts to consider “whether the board that would be
addressing the demand can impartially consider its merits without being influenced by improper
considerations” (emphasis added)).
185
    Pl.’s Verified Shareholder Derivative Compl. ¶¶ 12–22.
186
    Compl. ¶¶ 61–62.
                                                34
employees were disinterested with respect to the Leucadia loan transaction,187 and I

assume for purposes of this pleadings-stage analysis that they were not. Brown,

Davis, Fish, Gruen, LeGoff, and Silverman were outside directors,188 and they made

up a majority of the Board. The Plaintiff argues that the outside directors were not

independent with regard to the Leucadia loan because their approval of the loan

enabled them to retain their board positions and the compensation associated with

those positions. The Defendants vigorously dispute this proposition. I address the

Plaintiff’s entrenchment arguments below with respect to other claims advanced in

the Complaint. With respect to the Leucadia loan transaction, however, the issue is

irrelevant, because in any event, a majority of the directors who approved the

transaction cannot be considered disinterested.

       That is because, when presented with the proposed Leucadia loan, one of the

outside directors, Brown, expressed to the Board his intention, or wish, to become

involved in the transaction from the lender’s side.189 The Complaint is silent as to

whether he ultimately was a part of the Leucadia loan. Decisively here, however, in

apparent recognition that he was conflicted, he abstained from the vote.190 This left,



187
    See, e.g., Defs.’ Opening Br. 25 (arguing that, with respect to the Leucadia loan, “[t]here can
be no dispute that a majority of these eleven directors—Brown, Davis, Fish, Gruen, LeGoff and
Silverman—were independent, outside directors with no personal financial stake in the
[transaction]”).
188
    Pl.’s Verified Shareholder Derivative Compl. ¶ 2.
189
    Compl. ¶ 91.
190
    Id. ¶¶ 93–94.
                                                35
with respect to the Leucadia transaction, an effective ten-member board. With

respect to at least five of those members, the Defendants do not contend that they

can be considered disinterested for purposes of this motion. Under Aronson, then,

demand is excused. Since the facts alleged indicate that the transaction was not

approved by a Board with a majority of disinterested and independent directors, it is

reasonably likely that entire fairness review will apply here.191 In that situation, the

Board would be unable to effectively bring its independent judgment to bear on a

litigation demand, and demand is therefore excused.

       Because demand is excused, I must consider the alternative ground for the

Defendants’ Motion, dismissal under Rule 12(b)(6). Under that rule, a motion to

dismiss must be denied unless, accepting as true the well-pled192 facts and the

reasonable inferences therefrom, it nonetheless is not reasonably conceivable that

the Plaintiff can prevail.193 The Defendants argue that the Board was faced with the

Leucadia loan decision when the only alternative was corporate ruin; they describe



191
    See, e.g., In re Trados Inc. S’holder Litig., 73 A.3d 17, 44 (Del. Ch. 2013) (“To obtain review
under the entire fairness test, the stockholder plaintiff must prove that there were not enough
independent and disinterested individuals among the directors making the challenged decision to
comprise a board majority.”).
192
    I am well aware that pedants prefer “well-pleaded” to “well-pled.” This Court’s Webster’s
Twentieth Century Dictionary (1964) describes “pled” as “colloquial or dialectal.” My personal
Webster’s Third New International Dictionary (2002), on the other hand, allows it as a standard
alternative to the preferred “pleaded.” The Oxford English Dictionary describes “pled” as an
Americanism, which I suppose is good enough for me. In any event, I was raised with “pled”; if
my continued use of the term outs me as a mumpsimus, so be it.
193
    Cent. Mortg. Co. v. Morgan Stanley Mortg. Capital Holdings LLC, 27 A.3d 531, 535 (Del.
2011).
                                               36
the vote as existential with respect to the Company. It may prove so, but I have

found it reasonably conceivable that entire fairness review is invoked here. Under

that standard of review, it is appropriate that I examine the transaction with a full

record.194 The Motion to Dismiss under Rules 23.1 and 12(b)(6) is accordingly

denied with respect to the Leucadia transaction.

       The Plaintiff also alleges that a breach of duty inheres in Board approval of

the MOU to modify the Leucadia loan. The Complaint is silent as to whether Brown

voted for or abstained from the vote to approve the MOU. In light of my decision

on the Leucadia loan, I find it prudent to deny the Motion to Dismiss with respect to

the MOU pending discovery as well.

              2. The Rights Plan

       The Plaintiff also attacks the Board’s decision to approve (and later amend)

the Rights Plan in the aftermath of the Flash Crash. As with the Leucadia loan, the

Plaintiff first challenged the adoption of the Rights Plan in his initial complaint, at

which time the Board consisted of Niv, Ahdout, Grossman, Sakhai, Yusupov,

Brown, Davis, Fish, Gruen, LeGoff, and Silverman. Again, of those individuals,

Brown, Davis, Fish, Gruen, LeGoff, and Silverman were outside directors who

constituted a majority of the Board. The Plaintiff argues that demand is excused as


194
   See Williams v. Ji, 2017 WL 2799156, at *5 (Del. Ch. June 28, 2017) (“The entire fairness
standard of review ‘normally will preclude dismissal of a complaint on a Rule 12(b)(6) motion to
dismiss.’” (quoting Orman v. Cullman, 794 A.2d 5, 20 n.36 (Del. Ch. 2002))).
                                              37
to the Rights Plan under Aronson’s first prong because the outside directors

approved the Rights Plan to entrench themselves.

       To excuse demand as to a stockholder rights plan under the first Aronson

prong, a plaintiff “must plead particularized facts demonstrating that the directors

had either a financial interest or an entrenchment motive in [adopting] the Rights

Plan.”195 But “a conclusory allegation of entrenchment . . . will not suffice to excuse

demand.”196 And if the allegedly entrenching transaction “could, at least as easily,

serve a valid corporate purpose as an improper purpose, such as entrenchment,” then

demand will not be excused.197 Moreover, “a board need not be faced with a specific

threat before adopting a rights plan.”198

       Here, the FXCM Board adopted the Rights Plan in the aftermath of the Flash

Crash, when FXCM stock had declined by 87%. The Rights Plan initially had what

the Complaint describes as an “atypically low” 10% ownership trigger,199 which was

later reduced to 4.9%. The Plaintiff attempts to demonstrate an entrenchment motive

with respect to the Rights Plan by alleging that “the Board adopted the Rights Plan

simply to maintain their stronghold over the Company and keep the Company’s

shareholders at bay.”200 The result of the Rights Plan, according to the Plaintiff, is


195
    In re Chrysler Corp. S’holders Litig., 1992 WL 181024, at *4 (Del. Ch. July 27, 1992).
196
    Cottle v. Standard Brands Paint Co., 1990 WL 34824, at *8 (Del. Ch. Mar. 22, 1990).
197
    Id.
198
    Nomad Acquisition Corp. v. Damon Corp., 1988 WL 383667, at *5 (Del. Ch. Sept. 20, 1988).
199
    Compl. ¶ 109.
200
    Id. ¶ 111.
                                            38
that “FXCM’s shareholders have effectively lost their ability to oppose management

or influence corporate policy through an established proxy process because the

Rights Plan creates an unreasonable and intentional barrier to prevent shareholders

from acquiring meaningful ownership stakes in the Company.”201 The Plaintiff also

stresses that FXCM had “neither a history of contentious shareholder activism nor

any implicit threat of action by outside activist investors.”202 These allegations do

not suffice to excuse demand under Aronson’s first prong.

      For starters, the Plaintiff fails to allege any particularized facts suggesting that

the Board was motivated to entrench itself in adopting and later amending the Rights

Plan. It is not enough to offer, as the Plaintiff does here, the conclusory allegation

that “[i]n reality, the Rights Plan was designed to further entrench FXCM’s Board

and management in office by blocking any takeover efforts from third parties.”203

That is because, as noted above, “a conclusory allegation of entrenchment . . . will

not suffice to excuse demand.”204 And while FXCM was not faced with a takeover

threat from any particular party, that alone is not enough to successfully allege an

entrenchment motive.205 Given the precipitous decline in FXCM’s share price in the

wake of the Flash Crash—which could conceivably subject the Company to takeover


201
    Id.
202
    Id.
203
    Id. ¶ 108.
204
    Cottle, 1990 WL 34824, at *8.
205
    See Nomad Acquisition Corp., 1988 WL 383667, at *5 (“[A] board need not be faced with a
specific threat before adopting a rights plan.”).
                                            39
bids that did not capture the Company’s full value—it is clear from the Complaint

that the Board’s adoption of the Rights Plan “could, at least as easily, serve a valid

corporate purpose as an improper purpose, such as entrenchment.”206 Furthermore,

that FXCM had never previously faced serious threats from activist stockholders or

outside activist investors does not imply that the Board lacked a legitimate business

purpose for adopting and amending the Rights Plan at issue here. Finally, I note that

no accumulation of shares is alleged and no request to waive the Plan has been

presented to, let alone declined by, the Board. Such circumstances, should they

occur, may invoke equitable relief not available here, in a figurative vacuum. The

Plaintiff cannot allege any damages that flow from the adoption of the Rights Plan

about which he complains, and accordingly, no liability threatens the directors in

that regard. I find that demand is not excused as to the adoption of the Rights Plan.

                3. The Amended Severance Agreements and the Bonus Plans

        The Plaintiff also argues that the Board breached its fiduciary duties by

approving the amended severance agreements and the bonus plans. The decision to

approve the bonus plans took place after the Plaintiff filed his initial complaint, by




206
    Cottle, 1990 WL 34824, at *8; see also 1 Arthur Fleischer, Jr. & Alexander R. Sussman,
Takeover Defenses: Mergers and Acquisitions § 5.06[D][2] (7th ed. 2015) (“With respect to the
requirement of a reasonably perceived threat, it [is] . . . clear . . . that the courts will be willing to
accept that virtually any company is vulnerable to hostile takeover tactics which could subject the
company and its stockholders to significant disadvantage and that a board is justified in adopting
a pill to protect against this risk.” (footnote omitted)).
                                                   40
which time Reyhani had filled a vacancy on the board created by Fish’s departure.207

Thus, with respect to this decision, the operative Board for demand-futility purposes

consists of Niv, Ahdout, Grossman, Sakhai, Yusupov, Brown, Davis, Reyhani,

Gruen, LeGoff, and Silverman.208 Brown, Davis, Reyhani, Gruen, LeGoff, and

Silverman were outside directors, and they constituted a majority of the Board.

Since the Plaintiff first attacked the amended severance agreements in his initial

complaint, the relevant Board is almost the same as that for the bonus plans, except

that Fish was still a director and Reyhani had yet to take his seat.209

       The Plaintiff argues that demand is excused as to these transactions because

the outside directors who approved them were dominated and controlled by the

insider defendants, who stood to benefit financially from the transactions. The

executives who received the amended severance packages “would[, upon

termination,] be entitled to (1) two times their annual base salary on the termination

date, [and] (2) their annual target bonus (which is 200% of the executive’s annual

base salary).”210 These executives received a base salary of $800,000. Niv, Sakhai,

Ahdout, and Yusupov also became subject to new incentive-based bonus plans, as a


207
    Compl. ¶ 23.
208
    Since the Plaintiff concedes that demand as to the bonus plans must be shown to be futile with
respect to the Board as it existed after the Plaintiff amended his initial complaint, Pl.’s Answering
Br. 39, I do not analyze the question of the relevant Board for determining demand under the
framework set out in Braddock v. Zimmerman, 906 A.2d 776 (Del. 2006).
209
    Again, I follow here the Plaintiff’s view as to the relevant Board for demand-futility purposes.
Pl.’s Answering Br. 39.
210
    Compl. ¶ 113.
                                                41
result of which their compensation more than doubled between 2014 and 2015. And

in April 2016, FXCM amended these bonus plans in a way that allegedly made it

easier for the executives to obtain bonuses. The Plaintiff’s theory of demand futility

is that the outside directors lacked independence as to these transactions because

their board positions, and the compensation associated with them, would be in

jeopardy if they voted against deals that financially benefited the controlling insider

defendants.

       “Independence means that a director’s decision is based on the corporate

merits of the subject before the board rather than extraneous considerations or

influences.”211 A plaintiff may establish a director’s lack of independence by

alleging facts creating “a reasonable doubt that a director is so beholden to an

interested director that his or her discretion would be sterilized.”212 To raise doubts

about a director’s independence, a plaintiff “must allege particularized facts

manifesting ‘a direction of corporate conduct in such a way as to comport with the

wishes or interests of the corporation (or persons) doing the controlling.’”213

“Allegations as to one’s position as a director and the receipt of director’s fees,

without more, however, are not enough for purposes of pleading demand futility.”214


211
    Aronson, 473 A.2d at 816.
212
    Highland Legacy Ltd. v. Singer, 2006 WL 741939, at *5 (Del. Ch. Mar. 17, 2006).
213
    Aronson, 473 A.2d at 816 (quoting Kaplan v. Centex Corp., 284 A.2d 119, 123 (Del. Ch. 1971)).
214
    In re The Ltd., Inc. S’holders Litig., 2002 WL 537692, at *4 (Del. Ch. Mar. 27, 2002); see also
Benihana of Tokyo, Inc. v. Benihana, Inc., 891 A.2d 150, 175 (Del. Ch. 2005) (“[T]he fact that
directors receive fees for their services does not establish an entrenchment motive on their part.”
                                               42
Moreover, “conclusory allegations of domination and control are insufficient to

excuse pre-suit demand.”215 And “[s]tock ownership alone, even a majority interest,

is insufficient proof of ‘domination or control’ over a board of directors.”216 Instead,

the plaintiff must allege “particularized facts showing that an individual person or

entity interested in the transaction controlled the board’s vote on the transaction.”217

       The Plaintiff has failed to allege facts supporting a reasonable inference that

the insider defendants controlled and dominated the outside directors with respect to

the challenged transactions. The Plaintiff alleges that “[t]he combination of their

high-level executive and director positions, their influence over the Company’s

Board and their aggregate stock holdings, qualifies the FXCM Insider Defendants

as controlling shareholders.”218 But the conclusion that the insider defendants were

controllers is unsupported by any specific factual allegations detailing the manner in

which these defendants supposedly exerted control over the outside directors. True,



(citing Kahn v. MSB Bancorp, Inc., 1998 WL 409355, at *3 (Del. Ch. July 16, 1998), aff’d, 734
A.2d 158 (Del. 1999))).
215
    Ash v. McCall, 2000 WL 1370341, at *7 (Del. Ch. Sept. 15, 2000).
216
    Katz v. Halperin, 1996 WL 66006, at *8 (Del. Ch. Feb. 5, 1996) (quoting Aronson, 473 A.2d
at 815).
217
    Kahn v. Roberts, 1994 WL 70118, at *5 (Del. Ch. Feb. 28, 1994); see also Beam ex rel. Martha
Stewart Living Omnimedia, Inc. v. Stewart, 845 A.2d 1040, 1054 (Del. 2004) (“A stockholder’s
control of a corporation does not excuse presuit demand on the board without particularized
allegations of relationships between the directors and the controlling stockholder demonstrating
that the directors are beholden to the stockholder.”); In re Paxson Commc’n Corp. S’holders Litig.,
2001 WL 812028, at *9 (Del. Ch. July 12, 2001) (“Even where the potential for domination or
control by a controlling shareholder exists, the complaint must allege particularized allegations
that would support an inference of domination or control.”).
218
    Compl. ¶ 64.
                                               43
the insider defendants collectively held 27.7% of FXCM’s voting power. But while

a minority stockholder may in appropriate circumstances be deemed a controlling

stockholder who dominated the directors, “[a]n allegation of controlling stock

ownership does not raise, per se, a reasonable doubt as to the board’s

independence.”219 Instead, the plaintiff must “plead particularized facts alleging

that directors, constituting a majority of the board, were dominated or controlled by

a party with an interest in the transaction and thus unable to independently exercise

business judgment.”220        Such facts are wholly absent from the Complaint.

Accordingly, since the Plaintiff’s theory of demand futility here depends on the

existence of a controlling stockholder with the ability and willingness to terminate

the outside directors’ directorships, I conclude that demand is not excused under

Aronson’s first prong as to the amended severance agreements and the bonus plans.

       The Plaintiff attempts to show demand futility under Aronson’s second prong

by alleging that the amended severance agreements and the bonus plans constituted

waste. To successfully plead waste, a plaintiff “must allege particularized facts that

lead to a reasonable inference that the director defendants authorized ‘an exchange

that is so one sided that no business person of ordinary, sound judgment could




219
    Heineman v. Datapoint Corp., 611 A.2d 950, 955 (Del. 1992), overruled on other grounds by
Brehm, 746 A.2d at 253.
220
    Bodkin v. Mercantile Stores Co., 1996 WL 652763, at *2 (Del. Ch. Nov. 1, 1996) (emphasis
added).
                                             44
conclude that the corporation has received adequate consideration.’”221                    Put

differently, “[i]f . . . there is any substantial consideration received by the

corporation, and if there is a good faith judgment that in the circumstances the

transaction is worthwhile, there should be no finding of waste.”222 This Court has

held that “merely poor, misguided, or loss-making transactions are insufficient for a

finding of waste.”223 Accordingly, the standard for showing waste is “obviously an

extreme test, very rarely satisfied by a shareholder plaintiff.”224 These principles

apply with equal force in the area of executive compensation. “So long as there is

some rational basis for directors to conclude that the amount and form of

compensation is appropriate and likely to be beneficial to the corporation, the grant

will not constitute waste.”225 Thus, “allegations that compensation is ‘excessive or

even lavish . . . are insufficient as a matter of law to meet the standard required for

a claim of waste.’”226

       The Plaintiff’s waste claim premised on the insider defendants’ compensation

fails because the Complaint discloses a rational business purpose for the Board’s

decisions in this area: retaining top FXCM executives at a time when the Company


221
    In re Citigroup Inc. S’holder Derivative Litig., 964 A.2d 106, 136 (Del. Ch. 2009) (quoting
Brehm, 746 A.2d at 263).
222
    Lewis v. Vogelstein, 699 A.2d 327, 336 (Del. Ch. 1997) (emphasis omitted).
223
    Orloff v. Shulman, 2005 WL 3272355, at *11 (Del. Ch. Nov. 23, 2005).
224
    Steiner v. Meyerson, 1995 WL 441999, at *1 (Del. Ch. July 19, 1995).
225
    Id. at *8.
226
    Espinoza v. Zuckerberg, 124 A.3d 47, 67 (Del. Ch. 2015) (quoting In re 3COM Corp., 1999
WL 1009210, at *5 (Del. Ch. Oct. 25, 1999)).
                                              45
was undergoing serious difficulties. These executives were FXCM founders, and

given the dire straits the Company found itself in after the Flash Crash, the Board

could have reasonably concluded that incentivizing them to help the Company

recover was important.227 The Plaintiff may not be satisfied with the quality of the

services provided by these executives, but it is clear from the Complaint that the

Board’s decisions in this area “reflect[] at least some element of bilateral exchange

and that there were rational bases for the Board to agree to [them].”228 I therefore

reject the Plaintiff’s attempt to show demand futility as to the amended severance

packages and the bonus plans via a waste claim.229

              4. The Alleged Violations of Regulation 5.16

       I turn now to the Plaintiff’s claim that the Defendants breached their fiduciary

duties by allowing or causing FXCM to follow a business model allegedly premised

on violations of Regulation 5.16. The Plaintiff alleges both that the Defendants

adopted a business plan premised on violations of Regulation 5.16 and that they

chose to ignore various red flags related to these purported violations. According to

the Plaintiff, I must evaluate demand futility as to the first theory of liability under



227
    See Official Comm. of Unsecured Creditors of Integrated Health Servs., Inc. v. Elkins, 2004
WL 1949290, at *18 (Del. Ch. Aug. 24, 2004) (“Delaware law recognizes that retention of key
employees may itself be a benefit to the corporation.”).
228
    Zucker v. Andreessen, 2012 WL 2366448, at *10 (Del. Ch. June 21, 2012).
229
    For the same reasons, the Complaint fails to adequately plead facts demonstrating that demand
is excused with respect to the unjust enrichment claim against the corporate officers, which is,
obviously, subsidiary to the breach of duty claim addressed above.
                                               46
Aronson, while the second theory requires me to evaluate demand futility under

Rales. Under either approach, however, the fundamental question is the same: was

the Board as it was constituted when the Plaintiff filed his Complaint 230 capable of

exercising its business judgment in evaluating a demand involving these

allegations?231 The Plaintiff does not allege that the Defendants were interested or

lacked independence with respect to the alleged violations of Regulation 5.16. Thus,

the only avenue for pleading demand futility available to the Plaintiff is to

successfully allege that the Defendants face a substantial likelihood of liability

because they violated the duty of loyalty by allowing or causing the Company to

become a lawbreaker. For the reasons set out below, I find that the Plaintiff has

successfully pled demand futility as to FXCM’s purportedly unlawful conduct.

       The Plaintiff’s allegations about FXCM’s supposed violations of Regulation

5.16 were principally treated in briefing as a Caremark claim. Typically, Caremark

claims involve “a breach of the duty of loyalty arising from a director’s bad-faith


230
    Since the Plaintiff first made allegations pertaining to FXCM’s alleged violations of Regulation
5.16 in his Complaint, I must consider whether demand would have been futile with respect to
Board as it was constituted when the Complaint was filed. See Braddock, 906 A.2d at 786
(“[W]hen an amended derivative complaint is filed, the existence of a new independent board of
directors is relevant to a Rule 23.1 demand inquiry only as to derivative claims in the amended
complaint that are not already validly in litigation.” (footnote omitted)).
231
    See In re China Agritech, Inc. S’holder Derivative Litig., 2013 WL 2181514, at *16 (“[T]he
Rales test asks whether a director would face a substantial risk of liability as a result of the
litigation. To determine whether the participating directors would face a substantial risk of liability
in litigation challenging their prior decisions, a reviewing court examines whether the directors
had a personal interest in the decisions, were not independent with respect to the decisions, or
otherwise would not enjoy the protections of the business judgment rule. Those are precisely the
questions that Aronson asks.”).
                                                 47
failure to exercise oversight over the company.”232 In Stone v. Ritter,233 our Supreme

Court embraced the theory of director liability set out in Caremark, holding that such

a claim required a showing that “(a) the directors utterly failed to implement any

reporting or information system or controls; or (b) having implemented such a

system or controls, consciously failed to monitor or oversee its operations thus

disabling themselves from being informed of risks or problems requiring their

attention.”234 But the allegations here do not really involve “oversight” as that

concept is usually applied (although the allegations here can fit under Stone’s second

clause). The Plaintiff’s allegation here is that the directors are liable as a result of

knowingly causing, or knowingly failing to prevent, violations of positive law.

Where directors intentionally cause their corporation to violate positive law, they act

in bad faith; this state does not “charter lawbreakers.”235                While a Delaware

corporation may “pursue diverse means to make a profit,” it remains “subject to a

critical statutory floor, which is the requirement that Delaware corporations only

pursue ‘lawful business’ by ‘lawful acts.’”236 “As a result, a fiduciary of a Delaware




232
    Rich ex rel. Fuqi Int’l, Inc. v. Yu Kwai Chong, 66 A.3d 963, 980 (Del. Ch. 2013).
233
    911 A.2d 362 (Del. 2006).
234
    Id. at 370.
235
    In re Massey Energy Co., 2011 WL 2176479, at *20 (Del. Ch. May 31, 2011).
236
    Id.
                                               48
corporation cannot be loyal to a Delaware corporation by knowingly causing it to

seek profits by violating the law.”237

       Similarly, knowing failure to prevent such a violation implies bad faith.

“Where directors fail to act in the face of a known duty to act, thereby demonstrating

a conscious disregard for their responsibilities, they breach their duty of loyalty by

failing to discharge that fiduciary obligation in good faith.”238

       Here, Regulation 5.16 prohibits an FX trader from:

       represent[ing] that it will, with respect to any retail foreign exchange
       transaction in any account carried by a retail foreign exchange dealer
       or futures commission merchant for or on behalf of any person:
              (1) Guarantee such person against loss;
              (2) Limit the loss of such person; or
              (3) Not call for or attempt to collect security deposits, margin, or
              other deposits as established for retail forex customers.239

       The Defendants do not meaningfully contend that I may infer from the facts

in the Complaint that the directors were unaware of this legal prohibition against

limitation of customer loss, given the disclosures in the Company’s Form 10-Ks.

Nor do they so argue that the directors were unaware that, with respect to its core

business, retail FX trading, the Company openly and publicly touted that it would


237
    Id.; see also Desimone v. Barrows, 924 A.2d 908, 934 (Del. Ch. 2007) (“Although directors
have wide authority to take lawful action on behalf of the corporation, they have no authority
knowingly to cause the corporation to become a rogue, exposing the corporation to penalties from
criminal and civil regulators. Delaware corporate law has long been clear on this rather obvious
notion; namely, that it is utterly inconsistent with one’s duty of fidelity to the corporation to
consciously cause the corporation to act unlawfully.”).
238
    Stone, 911 A.2d at 370 (footnote omitted).
239
    17 C.F.R. § 5.16 (emphasis added).
                                               49
forgo pursuing customer losses, beyond margin investment, by its customers; a

policy intended, obviously, to gain market share and corporate profits.                          The

Defendants do argue that I may not infer that the directors were aware that the no-

debit policy violated the Regulation, at least until the CFTC brought its action

alleging precisely that in August 2016.240 And they point out that the Complaint is

silent about any CFTC action or warning before this time, and about anything else

that would have demonstrated illegality to the Board.

       With regard to a more complex and nuanced law that did not threaten a key

source of FXCM’s profits, or a more ambiguous Company policy, the Defendants

would undoubtedly be right that something more would need to be pled to invoke

scienter; for example, some indication making it inescapable to the Board that it

must act to prevent implementation of corporate policy, absent which positive law

would be violated. It would be a perverse incentive indeed were directors held liable

because a regulator adopted a legal interpretation at odds with a rationally compliant,

if ultimately unavailing, position adopted by the corporation.241 It would be equally


240
    See Defs.’ Reply Br. 11–12 (arguing that the “red flags” offered by the Plaintiff all “suffer from
the same fatal flaw—they fail to establish that the Board was aware that FXCM’s negative balance
policy violated Regulation 5.16. The fact that the Board was aware of FXCM’s negative balance
policy and Regulation 5.16 in light of statements in FXCM’s public filings and marketing materials
misses the mark. The pertinent question is whether the Board knew that FXCM was violating
Regulation 5.16 and nonetheless permitted FXCM to proceed with its negative balance policy. The
[Complaint] is devoid of any such facts”).
241
    See Melbourne Mun. Firefighters’ Pension Tr. Fund v. Jacobs, 2016 WL 4076369, at *12 (Del.
Ch. Aug. 1, 2016) (“The Complaint . . . acknowledges that the Board consistently expressed—
both verbally and through its actions—its view that its business practices were not violative of
                                                 50
perverse to hold directors responsible for knowledge of every regulation or law that

might impact their entity, or for every policy undertaken by corporate employees;

that is the basis for the scienter requirement and the focus on purported red flags

implying director knowledge.

       Here, I find the situation different from that described above. The primary

pursuit of the Company was retail FX trading.242 The Company pursued clients

explicitly on the ground that FXCM would hold them harmless for loss beyond

investment, in contradistinction to competing FX brokers.243                   I infer, and the

Defendants do not seriously contend otherwise, that the directors understood that

FXCM was engaged in this policy. I also infer, based on the facts alleged and the

Form 10-Ks, that the directors were aware of Regulation 5.16 and its prohibition on

advising clients that the Company would limit trading loss. The only question here

is whether, under these facts, I may infer that the directors knew the no-debit policy

violated the Regulation. This the Defendants contest. They point out that the

Complaint fails to allege any enforcement by the CFTC itself of Regulation 5.16



international antitrust laws and elected to address the relevant legal actions by focusing on
educating industry participants and government officials as to why its practices were legal and by
pursuing appeals.”), aff’d 158 A.3d 449 (Table) (Del. 2017).
242
    See Compl. ¶ 28 (“Retail trading is the main source of FXCM’s profits, with 76.6% of its 2014
trading revenues derived from retail and 23.4% from institutional customers.”).
243
    See, e.g., id. ¶ 54 (“A narrator on one official marketing video on the FXCM YouTube channel
clearly and unequivocally stated: ‘FXCM guarantees a client’s trading risk is limited to the equity
in their account. This means you will never owe a deficit balance as a result of trading even if a
significant amount of leverage is used. This is an important safeguard most forex brokers don’t
provide.’”).
                                               51
against FXCM, despite the Company’s open touting of its policy for a period of

several years following adoption of the Regulation. According to the Defendants,

this bolsters an inference244 that an interpretation exists that the no-debit policy did

not violate Regulation 5.16,245 and thus that an inference of scienter on the part of

the directors is impermissible.

       The Defendants may well be proved correct that, on a developed record, the

Plaintiff cannot demonstrate that the directors willfully acted, or refrained from a

known duty to act, causing the Company to violate the law. I find, however, that the

Regulation itself, on my reading, clearly prohibits touting loss limitations to clients,

and I find that the Company did precisely that. That reading is based on the plain

language of the Regulation; it is, I believe, bolstered by the purposes given by the

CFTC for the adoption of Regulation 5.16, which include avoiding the kind of

excessive trading risk that has crippled FXCM here.246 Given that finding, and given

the strong inference that the directors were aware of the Regulation and the

Company’s policy as well, my reading of Regulation 5.16 is sufficient at the


244
    I agree that the Company’s brazen touting of its loss-limitation policy is puzzling, and tends to
cut against scienter on the part of the Board, but not sufficiently to rebut the pleadings-stage
inferences described in favor of such a finding.
245
    According to the interpretations advanced by the Defendants, the Board could have reasonably
believed that the no-debit policy did not violate Regulation 5.16, because FXCM did not guarantee
its customers against losses; it merely promised not to collect debit balances.
246
    See id. ¶ 39 (“Regulation 5.16 was intended to protect companies from ‘extremely volatile
events.’ The CFTC remarked in the Supplementary Information of Regulation 5.16 that not all
retail forex counterparties have ‘technology [that] allows for automatic liquidation of positions if
the account balance falls below margin requirements.’” (alteration in original) (footnote omitted)).
                                                52
pleadings stage to infer scienter. I pause to emphasize that this case presents a highly

unusual set of facts: a Delaware corporation with a business model allegedly reliant

on a clear violation of a federal regulation; a situation of which I can reasonably

infer the Board was aware. I find, under these unusual facts, that a substantial threat

of personal liability renders the Board incapable of disinterestedly evaluating a

litigation demand, and demand is excused. Thus, the Complaint also states a claim,

and the Motion to Dismiss under both Rules 12(b)(6) and 23.1 is denied.247

       I note that the Defendants also sought dismissal of this Count on laches

grounds. If, under the facts and law I have found applicable here, the Defendants

wish me to consider laches, they should so notify me. Alternatively, they may

renotice the issue on a developed record. I make no determination on laches here.

       B. The Motion to Supplement

       Finally, I consider the Plaintiff’s Motion to Supplement the Third Amended

Complaint under Court of Chancery Rule 15(d). The Motion to Supplement was

made after briefing was complete and after oral argument on the Motion to Dismiss.

I then held a separate oral argument on the Motion to Supplement.248                   It became



247
    See McPadden v. Sidhu, 964 A.2d 1262, 1270 (Del. Ch. 2008) (“Because the standard under
Rule 12(b)(6) is less stringent than that under Rule 23.1, a complaint that survives a motion to
dismiss pursuant to Rule 23.1 will also survive a 12(b)(6) motion to dismiss, assuming that it
otherwise contains sufficient facts to state a cognizable claim.” (footnotes omitted)).
248
    The gravamen of the Plaintiff’s new proposed pleading is that the Company had an undisclosed
interest in a market maker with which it was making FX trades on behalf of its clients, so that its
interests diverged from its clients, in a way that violated the Commodity Exchange Act; and that
                                               53
clear at that oral argument that what the Plaintiff truly desired was to further amend

the Third Amended Complaint, to include allegations relating to the February CFTC

Order.249 The motion was styled a “Motion to Supplement,” I surmise, to avoid the

strictures of Court of Chancery Rule 15(aaa), which prohibits such an amendment

during pendency of a motion to dismiss, after the Plaintiff has filed an answering

brief.250 Having now denied the Motion to Dismiss, in part, the Plaintiff may refile

his motion as a Motion to Amend, to the extent he finds such a motion appropriate.

                                      III. CONCLUSION

       For the foregoing reasons, the Defendants’ Motion to Dismiss is granted in

part and denied in part. Consideration of the laches defense is deferred. The parties

should submit an appropriate form of order.




failure to prevent these actions represented bad faith on the part of the FXCM Board. Pl.’s Mot.
for Leave to File a Supplement to the Compl. 3–4.
249
    See May 17, 2017 Oral Arg. Tr. 7:24–8:13 (“THE COURT: But it is clear to me that since you
are saying I need to take into account the supplement in deciding the motion to dismiss, that this
is strictly within the purview of [Rule] 15(aaa) no matter how you characterize this, as a
supplement or as an amendment. You are seeking to amend the universe of alleged facts under
which I have to consider the motion to dismiss. And the question . . . to me . . . is simply this: The
fact that, through no fault of the plaintiff, these preexisting facts were unknowable at the time the
answer was filed, is that the equivalent of good cause under [Rule] 15(aaa) to allow either an
amendment or supplement? That, really, is what we’re talking about here, isn’t it? MR. AMADOR:
That sounds right.”).
250
    See E. Sussex Assocs., LLC v. W. Sussex Assocs., LLC, 2013 WL 2389868, at *1 (Del. Ch. June
3, 2013) (“Rule 15(aaa) requires a plaintiff that wishes to amend its complaint in response to a
motion to dismiss to file its amended complaint before responding to the motion to dismiss.”
(citing Ct. Ch. R. 15(aaa))).
                                                 54
