Barclays mounts robust defence against dark pool allegations
Barclays has firmly rebutted the claims made against it by Eric T Schneiderman (pictured), the New York Attorney General, over the operation of its dark pool with a robust defence of its practices.
In a 49-page statement document filed with the Supreme Court of New York, the bank stated: “This case is about purported “false advertising” by Barclays regarding Barclays LX, an Alternative Trading System (“ATS”) used by highly sophisticated investors. Relying primarily on snippets of marketing brochures and brief quotes in news articles, the New York Attorney General (“NYAG”) alleges that Barclays misled LX customers about the extent of “aggressive” trading in LX by High Frequency Traders (“HFTs”) and about Barclays’ efforts to protect customers from that trading.
“Fundamentally, the Complaint fails to identify any fraud—establishing no material misstatements, no identified victims, and no actual harm. The Complaint ignores that LX’s customers are highly sophisticated traders and asset managers responsible for investing millions or billions of dollars of assets, who execute trades across multiple markets and ATSs, are capable of closely monitoring the quality of execution they receive based on extensive data, and can select from multiples platforms on which to execute their trades based on detailed execution data, not on the glossy marketing brochures or quotes from magazine articles the NYAG cites.
“Moreover, the Complaint is based on clear and substantial factual errors.
“Unfortunately, at this stage of the litigation, the pleading standards limit Barclays’ ability to rebut those factual errors—but should this litigation proceed to the next stages, Barclays will introduce evidence demonstrating how far off base these allegations are. For present purposes, though, the very marketing documents and emails from which the Complaint selectively quotes, along with the Complaint’s other fatal flaws, are sufficient to require dismissal of this “fraud” action.
“The Court should dismiss this Complaint for three independent reasons:
- First, in seeking to extend its regulatory authority to trading platforms, the NYAG ignores that the plain text of the Martin Act—on which the NYAG’s claims are predicated—is limited to actions for fraud in the purchase or sale of “securities,” and does not extend to all actions related to finance. Here, the allegations solely concern the functioning of LX as an alternative trading platform, and do not identify any misstatements concerning any “security.” Moreover, to date, only the U.S. Securities and Exchange Commission (“SEC”) has regulated ATSs—which the Complaint estimates handle over 40% of all equity trading in the United States—and so expanding the Martin Act to cover ATSs threatens conflict between it and the Securities Exchange Act of 1934 (“Exchange Act”), which specifically authorizes the SEC to develop national regulations for ATSs such as LX. The NYAG’s claims are an attempt to impose new regulations that are in addition to, and potentially contradict or supplant, the SEC’s judgments about the regulations to impose on this important mechanism to the U.S. economy.
“The Court should not create such unnecessary conflicts with federal law, and should reject this unnecessary expansion of the Martin Act.
- Second, even if the NYAG had authority to bring suit here, its claims fail on the merits. The Complaint does not allege which (if any) of Barclays’ highly sophisticated clients saw these supposed misstatements, when (if ever) they saw them, whether the marketing flyer and news quotes were material to those clients (who had access to much more significant and detailed information about LX), and whether those clients were harmed by them. Accordingly, the Complaint fails to meet its burden of pleading misstatements that are particularized and material. The Complaint seeks to overcome these defects with statements purportedly made by unidentified former Barclays employees—ignoring the rule that courts should be wary of anonymous, self-interested sources. But without allegations setting forth the circumstances of the supposed fraud, the Court cannot infer that any actionable fraud even occurred. For this reason alone, the Complaint must be dismissed.
“This lack of particularity is unsurprising, given that even a cursory examination of the materials cited in the Complaint demonstrates that they were intended only for sophisticated clients and that they transparently disclosed the volume of HFT and “aggressive” trading on LX.
“Contrary to the Complaint’s allegations, the very Barclays marketing materials on which the NYAG relies made clear that HFTs were a substantial part of LX traders and transparently marketed LX as a platform on which clients could benefit from the liquidity provided by HFTs, while having the option of reducing exposure to “aggressive” order flow.
“To the extent the Complaint alleges that Barclays misrepresented the level of “aggressive” trading in LX, those allegations are premised on mischaracterizations of documents portrayed in the Complaint in a way that removes the important information and context Barclays provided about HFTs and “aggressive” trading in LX. For example, the chart on the marketing flyer attacked by the NYAG for falsely representing the number of HFTs trading on LX was clearly labeled “Sample,” and never said that it depicted actual data for any particular client population, or over any particular time frame, and could not plausibly be interpreted that way. Indeed, on the very same page of that flyer, Barclays disclosed that 35% of the traders on LX were HFTs.
- Third, the Complaint wrongly seeks damages and restitution for the People of the State of New York without alleging that the People—let alone any LX clients—actually suffered any harm. But under New York law, litigants bringing Martin Act claims must allege damages resulting from the defendants’ alleged misrepresentations.”
“For each of these reasons, the Court should dismiss the Complaint with prejudice.”
The case is being watched closely by other dark pool and ATS operators, but a decision on whether to allow the lawsuit to proceed is unlikely to be made for some time yet.