Your Capital (still) at Risk Part 12: Legal Consequences 1


Disclosure: Short PLUS. This content is not directed toward persons with residence or place of business in the United Kingdom. By accessing, transmitting, or reviewing this material, you acknowledge that the author has represented his honest opinion and made statements of fact believed to be true at the time of publication. No content herein should be construed as a recommendation to take action with respect to any security.

Part 1: Short Plus500
Part 2: Bucket Shop
Part 3: Customer Lifetime Value
Part 4: Companies House Inconsistencies
Part 5: Audit Opinions
Part 6: Unlicensed Activity
Part 7: Whois Plus500?
Part 8: Scalping
Part 9: Worldwide Web
Part 10: Competition
Part 11: Unanswered Questions
Part 12: Legal Consequences

Customer complaints suggest Plus500 often treats users unfairly and in possible violation of law. I believe Plus500 will face material legal consequences for its treatment of customers, marketing activities, and disregard for local regulatory requirements.

After publishing this series, I have been contacted by several former Plus500 customers who believe they were defrauded by the company. One individual in the Netherlands shared a long and extensively documented complaint, which was submitted to the FCA and the Financial Ombudsman in April.

The current AML-related inquiry by the FCA is unlikely to be an isolated event. In light of the company’s actions toward its customers, I strongly suspect that the additional scrutiny stems from multiple such customer complaints.

When a gambler visits a casino, the gambler gambles with the knowledge that the house has an edge. When a novice trader trades with Plus500, the trader knows the odds do not favor long-term success at highly leveraged CFD trading. However, the trader expects that the platform is organized in a way that is fair and objective, and that prices will accurately reflect developments in the underlying securities. A review of customer complaints suggest several ways in which this may not be the case.

In this post, I’ll use a case study of complaints from a single Dutch affiliate forum to set out a few ways in which it appears the company has crossed the line. Thank you to MM for translation assistance. The forum in question is hosted by affiliates of Plus500 and offers Netherlands-based customers of Plus500 a Dutch-language venue to discuss their experience.

Note that many customer complaints are by novice traders. They sometimes mix legitimate concerns with misunderstandings of typical financial contract terms. That does not change the basic facts of their complaints. Suitability considerations and regulatory requirements generally place the burden for properly documenting the terms and conditions of a trading platform on the company, not its users.

I’m sure affiliates will explain away some behavior documented below as being part of industry norms, but the argument is not that Plus500 is necessarily the worst offender among all platforms. Being mostly fair, or fair to most users, is not sufficient. If Plus500 has in fact manipulated its platform to the disadvantage of some users, there will be significant consequences. At a minimum, Plus500 takes advantage of inexperienced traders. If the customer complaints are accurate, it also cheats them.


  1. Arbitrary expiry procedures
    Customers note that Plus500 sets arbitrary expiration dates for contracts that do not match the underlying instruments and are not always clearly communicated or adhered to. Expiry terms are not well-documented, and Plus500 sometimes expires existing contracts early, without prior notice. Contract expiry typically occurs on a weekend at the last Plus500 quoted price on Friday (not necessarily the relevant underlying price)—this is how Plus500 records profits on Saturdays. Plus500 retains sole discretion to roll contracts to the next expiry. Customers opening positions in a new contract do not have transparency into which futures series is used to determine opening prices.

    Trader Rokil
     complains about an unannounced early expiration in Coffee, resulting in a loss. Trader Fredkroket says this happened to him in Bitcoin as well.

    Trader Snarf complains about an expiry date unexpectedly set one week before the expiry date of the underlying front-month contract at CME. Administrator Armijn admits he also missed an expiry date once and lost money because it was written in fine print on the second page of an instrument. Trader Navras replies with the same experience.
    Plus500 retroactively changed the expiry date of an outstanding Bitcoin contract, resulting in a loss for Trader Peacock. Trader Linda mentions a similar experience with Facebook. She claims her trade history on that instrument was erased.


    Trader Freedom Capital
    on an English-language website describes how a Bitcoin contract with a November 30, 2013 expiration date was closed in mid-November and replaced with a daily expiration (with higher costs) without notice. 

  2. Inopportune cancellation of withdrawals
    A basic principle of dealer-model CFD brokerage is that customers cannot owe the brokerage more money than they have on deposit. However, because Plus500 takes a long time to process withdrawals, it sometimes uses the delay to its advantage. Customers have reported withdrawn amounts, which were already debited from their Plus500 accounts but had not yet been transferred, being cancelled and returned without warning, placing the funds at risk to cover open positions. Other customers have reported suspicious timing of rejected withdrawal requests, despite proper documentation, that occurred within minutes of new positions being opened.


    Trader Thomasson
     reports funds he had already withdrawn were returned to his account to cover a margin deficit. The withdrawal was still ‘pending’ but had already been debited from the account for several days when he went below margin. Plus500 used the withdrawn funds to cover the margin deficit, but this amount was insufficient so the positions were closed at a total loss of both the withdrawn amounts and other monies on deposit.

  3. Difficulty closing positions
    Several users have reported unexplained, system errors that prevent positions from being closed while in a profit position. In other instances, profitable positions remain open and exposed to market risk because Plus500 chooses not to make quotes available on the platform at its discretion.

    Trader GBG could not close a USDRUB position at a profit one hour before the stated closing time of the market. He tried unsuccessfully for an hour, the market closed, and the next day his position changed to a loss and could once again be traded. Plus500 support responded that the ruble was unavailable for trade due to ‘low trading volume’ despite external trades taking place in the underlying. GBG has complained to the FCA and changed brokers.

    Trader Verlangen complained that he could not close his position at a profit; the close button did not work. After his trade entered a loss position, he could close it again.

  4. Miscellaneous platform inconsistencies and policies
    Traders cite a variety of arbitrary rules and actions by the company that work to their detriment, including closed accounts, price divergence from the underlying, and different withdrawal limits for different users. Some traders claim prices quoted on Plus500 demonstrate higher volatility than the evolution of the underlying, resulting in additional losses for leveraged traders. As discussed in Part 8, traders worry about the definition of “scalping” in the User Agreement. While Plus500 appears to ultimately resolve scalping complaints in favor of the users who push back (after several months, in the case of two different Singaporean users), how many more inexperienced traders simply go along with it when they are told that their profits are illegitimate?


    Trader Linda
     concludes that with a definition like “a systematic trading strategy” Plus500 can call just about anything scalping. Plus500 support is quoted: “Please note that scalping has no specific time definition. A trader is considers as scalper when using a systematic trading strategy of holding short-term positions. Please be aware that when examining a scalper we look at the overall trading activities, rather that just on a certain position.”


    Discussion about scalping
    ; traders worrying if trades under ten minutes are considered scalping.Trader Ikbener somehow managed to open two accounts and made EUR 4,500 from his sign-on bonus. The profitable account was closed, and he was not allowed to collect the profit.
    Trader Johanserv
    complains about inexplicable differences between quotes at Plus500 and on other financial sites.


    Trader Pokemon
    asks about the minimum amount of money he can withdraw. Administrator Armijn and Linda figure out that it is different for all users. For the administrator himself, the minimum has increased over time; he speculates that it might reflect higher bank costs. Trader Linda concludes that it is completely unclear how and why Plus500 determines the minimum withdrawal sum for various users.


    Trader Vijo
    complains that Plus500 closed his account after two years of trading, without announcement or reason, and made a new one for him while not transferring all of the money or positions on his old account. Plus500 support stated that his new account was reopened at Plus500′s Cyprus subsidiary, Plus500CY. The miscalculation of money in the old account was never fully explained.

The message to Trader Vijo from Plus500 support, dated February 23, 2015, confirms that Plus500 has been transferring UK-regulated client accounts to Cyprus, as reported on LeapRate and Business Insider last week. Trader Vijo’s experience confirms that Plus500 has been attempting a regulatory arbitrage for months before the recent voluntary action. Why would Plus500 transfer EU clients to Cyprus while under investigation by the FCA? This action strongly suggests the company is trying to take advantage of the EU passporting mechanism from a jurisdiction with less stringent oversight. Full email reproduced from the thread below:

Hello, 

We reviewed your account and would like to inform you That as you already agreed by accepting the New User Agreement, due to a regulation change – from The Financial Conduct Authority (FCA) to the Cyprus Securities and Exchange Commission, your old account was closed on 02.16.2015 and the balance of (€ -157.67) was Transferred to a new account with the same email address, but under the new regulation. 

You can still have access to your previous account under the email: old_mail@emailadres.nl and your old password, for information and taxation Purposes, for 30 days after the opening of your new account. After That period the old account (old_mail@emailadres.nl) will be closed and you will be trading into account: mail@emailadres.nl. 

This change did not have any effect on your account’s trading only the change in e-mail. 

Your current account is exactly the same as the old one, simply under a different regulation. 

Regards 
Erikka 
Customer Support 
Plus500 CY Ltd 
1 Siafi Street 
3042 Limassol

In addition to the above individual experiences, the customer complaint to the FCA documented an extensive list of ways in which the Plus500 User Agreement is inconsistent with Dutch Law and the UK’s Unfair Contract Terms Act. It also highlighted numerous ways in which the trading platform is risk-enhancing and unsuitable for novice traders. Minimum order sizes and thresholds are in some cases larger than the tick size of the underlying instrument. Default order sizes are very high relative to customer account balances. Plus500 also upgrades most users to a “Gold account” after a short period of activity, setting the default order size and leverage limit to a much higher level.


I am not an attorney, but I have four theories of how legal liability could attach to Plus500 as a result of these and other actions, some of which were referenced in Part 9. While customers have been contacting journalists, short sellers, and the FCA, they really should be in touch with a competent multi-national law firm. The allegations just among Dutch customers alone appear sufficient to support a class action suit. This is a situation where a determined prosecutor or advocate could make a real difference for customers who have lost money unfairly.

  1. Class action complaint by customers: I recognize that the United States is a much more litigious society than Europe. Here, there would already have been multiple shareholder derivative actions based on all the things people were upset about at the AGM. However, the allegations documented above are serious and warrant investigation. If a court determined that Plus500 acted abusively, restitution and punitive damages could be significant.
  2. Foreign regulatory fines and claims: Plus500 operates without a license in many parts of the world, as detailed in Part 11. Any customer losses attributable to the platform are in theory null and void, as the company operated without authorization and could not enforce its user agreement. While it might be difficult or impossible for a foreign regulator or court to enforce a judgement upon Plus500, the risk remains. Plus500 operates using currencies and the international banking system in ways that may bring it into the regulatory net of other countries, including the US.
  3. Local marketing violations: Plus500 notes in the Admission Document that its affiliates may run afoul of local securities marketing requirements. It does not note explicitly that it accepts affiliate marketers located in jurisdictions where it is not authorized to operate, including the United States. Affiliates who receive revenue sharing arrangements are in effect participating in a multi-level marketing scheme and receiving up to 30% of the turnover of an unlicensed broker-dealer. The US SEC and Department of Justice are not likely to look kindly upon US persons profiting from the operations of a foreign securities firm that is not authorized to operate in the US, while using US means of commerce to promote that entity. Local authorities have been notified.
  4. UK or Cyprus regulatory fines or loss of registration: So far, the FCA has not shown itself to be particularly punitive. At the AGM, Plus500 said there was no evidence that the FCA will issue a fine for Plus500′s AML procedures. However, if the allegations by customers are true, there may be meaningful consequences for other behavior.

With that, I will reiterate the question I raised in Part 10: Would you do business with Plus500?


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One thought on “Your Capital (still) at Risk Part 12: Legal Consequences

  • Reply
    Alexander

    Today my position in plus500 was forcefully closed due to a margin call. I suffered 2000 euro loss. I had a cfd on the stock of under armour (UA) (class a) which was being traded at 31 dollars. on 7 december 2016, the under armour changed ticker on the NYSE. Class a shares became UAA, while class c shares, which were being traded at 25 dollars, became the new UA. Instead of adapting this change in their system, plus500 just changed the rate for existing positions, creating a 25%+ loss… I have written several times to plus500, but they are not willing to provide me compensation or reopen my positions.
    This is a clear breach of contract (cfd) as i had a contract on class a shares, while they suddenly changed it to class b shares. 2 totally different instruments. It is the same as if you would buy stock of apple and find out that you ofn facebook instead.
    what should i do? Can i start a legal action? I live in holland, do i need a dutch, a british or a cyprian court/lawyer?