September 21, 2021

Barclays Moves to Dismiss AG’s Suit Over ‘Dark Pools’

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barclaysBy Suevon Lee, New York Law Journal

Barclays is challenging the authority of New York’s top lawyer to sue the bank for fraud over allegedly deceptive statements it made to investors concerning high frequency trading in its “dark pool,” or private stock exchange.

Attorney General Eric Schneiderman filed civil fraud claims against the bank last month under the Martin Act, the state law that authorizes the attorney general to regulate and investigate fraud relating to the sale of securities.

Schneiderman’s June 24 complaint alleges that the British bank lied to investors in sales meetings, marketing materials and statements to the media about the level to which it policed aggressive predatory trading in its dark pool, when it was actually facilitating it.

Sullivan & Cromwell, in a motion to dismiss the suit Thursday, argued that the Martin Act cannot be enforced because the dark pool at issue, known as Barclays LX, does not constitute a security under a federal test adopted by the New York Court of Appeals.

“In order to earn profits trading in LX, clients must expend effort in selecting suitable securities, formulating and managing their trading strategies and monitoring their portfolios,” the motion states. “LX simply facilitates transactions.”

David Braff, Jeffrey Scott and Matthew Schwartz, partners at Sullivan & Cromwell, are representing Barclays, in addition to attorneys at Boies, Schiller & Flexner and Wilmer Cutler Pickering Hale & Dorr.

Barclays LX is an alternative trading system or “dark pool” so named because traders can purchase and sell shares without it being publicly shared as with traditional public stock exchanges. The pool was anticipated to rake in an estimated $37 to $50 million per year for the bank, according to the attorney general’s suit.

The suit claims that Barclays made false representations in written marketing materials and favored high frequency traders over brokerage clients such as institutional investors, mutual funds and pension funds when it pledged to crack down on toxic trades.

In its motion to dismiss, Barclays contends that the “highly sophisticated traders and asset managers” who comprise Barclays LX client base did not have to rely on marketing materials. It also argues that the complaint lacks particularized and material evidence, since it does not identify the Barclays’ traders on whom the A.G. relied during its investigation.

It also accuses the New York attorney general’s office of overstepping its bounds to create new regulations that “supplant” those enforced by the Securities and Exchange Commission at the risk of usurping “Congress’ goal of national uniformity and calibration of regulatory requirements.”

“Barclays works closely with its regulators in all jurisdictions and will continue to cooperate with the New York Attorney General,” Barclays spokesman Mark Lane said in an emailed statement. “However, we do not believe that this suit is justified, and we have a duty to our shareholders, clients and staff to defend our position.”

In a column for the New York Law Journal shortly after the A.G. suit was filed (“High Frequency Trading After Barclays: What’s Next?” July 17), John Coffee, Jr., a professor at Columbia University Law School and director of its Center on Corporate Governance, wrote that the “SEC may continue to be the agency least likely to act with respect to high frequency trading” and that New York-based regulators are increasingly stepping in to address these alleged practices.

Barclays’ motion further challenges the attorney general’s standing to seek damages—an amount that has not been specified in the complaint—on behalf of private parties.

In a statement released Thursday in response to Thursday’s filing, the attorney general’s office said it was “confident that a judge will reject this motion and allow us to prove these disturbing allegations in court.”

IMAGE: AP/Kirsty Wigglesworth

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