Barclays Seeks Dismissal of New York’s Dark Pool Lawsuit

Jul 24, 2014 12:02 pm ET

(Updates with attorney general comment in ninth paragraph.)

July 24 (Bloomberg) -- Barclays Plc asked a judge to throw out New York Attorney General Eric Schneiderman’s lawsuit that accused the bank of lying to customers and hiding the role of high-frequency traders to boost its dark pool profile.

The London-based bank said the lawsuit fails to show any investors were harmed and is based on “clear and substantial factual errors,” according to a filing today in Manhattan state court. The attorney general’s office also took New York’s securities law -- the Martin Act -- too far in bringing the lawsuit, the bank alleged.

The law, a powerful anti-fraud statute that can be used by the New York attorney general’s office, is “limited to actions for fraud in the purchase or sale of ‘securities’ and doesn’t extend to all actions related to finance,” Barclays said. The allegations in the case concern an alternative trading platform known as Barclays LX and “do not identify any misstatements concerning any ‘security,’” according to the filing.

Extending the Martin Act to cover alternative trading systems threatens a conflict with the U.S. Securities Act of 1934, which gives the Securities and Exchange Commission power to regulate systems such as LX, Barclays said in the court filing.

The suit ignores that customers who use the Barclays LX are “highly sophisticated traders and asset managers” who are responsible for investing millions and billions of dollars worth of assets, the bank said in a court filing.

Multiple Markets

Customers trade across multiple markets and alternative trading systems and have extensive data available to monitor how transactions are executed and which platform to use, the bank said. The customers don’t rely on “glossy marketing brochures or quotes from magazine articles” the attorney general cites, according to the filing.

Schneiderman has taken a leading role in seeking to reform equities trading in the $23 trillion U.S. stock market, examining whether exchanges and dark pools give unfair perks to high-frequency traders.

Barclays clients such as institutional investors were led to believe they were safe from predators on a trading venue where aggressive trading strategies were in fact encouraged, according to Schneiderman’s lawsuit, filed last month.

The suit “clearly details the allegations that Barclays engaged in a persistent pattern of fraud and deceit, lying to its investors in order to grow its own dark pool,” Schneiderman said in response to today’s request from the bank for the dismissal of the lawsuit.

Crack Down

“The Attorney General is committed to ensuring there is one set of rules for everyone in the markets, and will crack down on abuses wherever he sees them,” Schneiderman said. “We are confident that a judge will reject this motion and allow us to prove these disturbing allegations in court.”

Since being fined 290 million pounds ($492 million) by regulators in the U.S. and U.K. in 2012 for submitting false London and euro interbank offered rates, Barclays has changed chief executives and sought to alter its image and how it operates.

Antony Jenkins took over after the Libor scandal cost Chief Executive Officer Robert Diamond his job, promising to overhaul the bank’s culture and committing to values of integrity and respect.

Still, allegations of misconduct follow the bank. It was fined $44 million in May by Britain’s markets watchdog for failing to stop a trader from manipulating the price of gold to cheat a client the day after the Libor settlement was announced.

Insurance Sales

Barclays had to set aside almost 4 billion pounds to compensate consumers who were sold payment-protection insurance that failed to cover them or they didn’t require.

Barclays works closely with regulators in all jurisdictions and will continue to cooperate with Schneiderman, the bank said in an e-mailed statement.

“We do not believe this suit is justified, and we have a duty to our shareholders, clients and staff to defend our position,” Barclays said.

The suit should be dismissed because the Martin Act is limited to actions for fraud in the trading of securities, “and does not extend to all actions related to finance,” the bank said in today’s filing.

News Quotes

The suit doesn’t specify which Barclays clients saw the brochures and news quotes cited by the attorney general and doesn’t say whether any customers were harmed by them, according to the filing.

The marketing materials that the attorney general relies on made it clear that high-frequency traders were a “substantial part” of those using LX, which was touted as a platform where clients could benefit from liquidity provided by HFTs with the option of reducing exposure to “aggressive” order flow, according to the filing.

The attorney general mischaracterized the documents by removing information and context that Barclays provided about high-frequency traders and “aggressive” trading in LX, according to the filing.

One marketing flyer that prosecutors said falsely represented the number of high-frequency traders was labeled as a sample and never purported to use actual data, and it disclosed that 35 percent of LX users were high-frequency traders, according to the filing.

Actual Harm

The suit also seeks damages and restitution without alleging that anyone in New York, or LX clients suffered actual harm, a requirement of the Martin Act, the bank said.

Barclays saw the number of U.S. shares traded in its dark pool decline for a second week after Schneiderman’s suit was filed, according to data from the Financial Industry Regulatory Authority.

About 66 million U.S. shares were traded in the dark pool in the week of June 30, down 66 percent from about 197 million in the previous week, according to Finra data. The drop follows a 37 percent decline from 312 million in the previous week, the data show.

Barclays dropped from second place behind Credit Suisse Group AG as the largest dark-pool operator in the U.S. to 12th, the Finra data show. Credit Suisse, which remains No. 1, saw a 19 percent drop in the number of shares traded in that week.

The case is New York v. Barclays Capital, 451391-2014, Supreme Court of the State of New York, County of New York.

--With assistance from Sam Mamudi in New York and Richard Partington in London.