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From Securities Regulation Daily, November 6, 2017

Barclays fails to rebut Basicpresumption in dark pool action

By Rodney F. Tonkovic, J.D.

A Second Circuit panel has affirmed a judgment certifying a class claiming that Barclays PLC made false representations about the operation of its "dark pool." The panel found that the district court erred in holding that the Affiliated Ute presumption of reliance applied because the claims were based on misrepresentations. The Basic presumption, however, did apply, and Barclays failed to rebut the presumption by a preponderance of the evidence (Waggoner v. Barclays PLC, November 6, 2017, Droney, C.).

Dark pools. Barclays operates an alternative trading system known as the Barclays Liquidity Cross (LX). LX operates as a "dark pool" allowing investors to trade in a largely anonymous manner. Barclays made a number of statements asserting that LX was a haven from practices engaged in by high-frequency traders such as "front running," that is, detecting large incoming trades and trading before those trades are completed. In June 2014, however, the New York Attorney General’s Office brought a lawsuit against Barclays, alleging that the representations about the protections LX afforded its customers from high-frequency traders were false and misleading. On news of the lawsuit, Barclays PLC’s American Depositary Shares (ADS) fell over 7 percent on heavy volume.

Investors alleged that Barclays allowed predatory high-frequency traders to operate within LX and even gave them information that was not available to other traders. As a result, the price of Barclays' ADS was inflated until the New York lawsuit was filed. Barclays moved to dismiss the suit, stating, among other arguments, that the alleged misstatements were not material given the relatively small amount of revenue involved. The district court disagreed, concluding that while LX was a small part of Barclays' business, the misstatements could be qualitatively material in the context of Barclays' history of scandal.

District court certifies. The district court subsequently granted class certification for certain purchasers of Barclays' ADS. The court concluded that the Affiliate Ute presumption of reliance applied, explaining that material omissions were at the heart of the case. In the alternative, the court said, the Basic presumption also applied, reasoning that, under Cammer, all of the indirect factors showed an efficient market and that direct evidence of price impact was thus not necessary. The court then found that Barclays failed to rebut the Basic presumption because it failed to demonstrate that the allegedly fraudulent statements did not impact the ADS price.

Affirmed. On appeal, Barclays argued that the district court erred in: concluding that the Affiliated Ute presumption applied; concluding that Basic applied without direct evidence of market efficiency; requiring a preponderance of evidence to rebut the Basic presumption; and approving the plaintiffs' damages model. The panel agreed that Affiliated Ute was inapplicable here, but rejected Barclays' other arguments.

The panel agreed with Barclays' argument that Affiliated Ute did not apply because the complaint was based mainly on allegations of affirmative misrepresentations, not omissions. According to the panel, the complaint alleged numerous affirmative misstatements and focused the claims on them. Further, the alleged omissions were directly related to these misrepresentations and exacerbated their misleading nature. Affiliated Ute, the panel pointed out does not apply where earlier misrepresentations are made more misleading by later omissions.

The Basic presumption of reliance, however did apply in this case. The panel concluded that direct evidence of price impact under Cammer is not always necessary, and that that evidence was not required here at the class certification stage. While the fifth Cammerfactor is important, the panel said, it is just one tool in examining the Basic presumption, and certain factors can be more important than others in assessing particular markets for efficiency. In this case, the district court's decision not to rely on direct evidence was permissible because all of the seven indirect factors weighed clearly in favor of finding an efficient market.

The panel then affirmed that Barclays failed to rebut the Basic presumption and that it was not erroneous to require that this be shown by a preponderance of the evidence. Supreme Court guidance plus prior Second Circuit decisions, the panel said, indicate that defendants seeking to rebut the presumption must demonstrate a lack of price impact by a preponderance of the evidence at the class certification stage. The panel then agreed that the district court was within its discretion to conclude that the lack of price movement on the dates of the alleged misrepresentations did not rebut the presumption. Also, while there may have been other factors contributing to the price drop, this did not mean that the alleged fraud did not also have an impact.

Damages. Finally, the panel found that the damages methodology used to calculate classwide damages was appropriate. Barclays asserted that the plaintiffs' model neither disaggregated damages resulting from other factors nor accounted for variations in inflation over time. The panel found that the plaintiffs' damages model was directly linked to their underlying theory of liability, which is all that is required under the Supreme Court's decision in Comcast.

The case is No. 16-1912-cv.

Attorneys: Jeremy Alan Lieberman (Pomerantz LLP) for Joseph Waggoner. Jeffrey T. Scott (Sullivan & Cromwell LLP) for Barclays PLC.

Companies: Barclays PLC

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