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From Securities Regulation Daily, April 27, 2015

Claims that Barclays invited predators into its dark pool survive dismissal

By Rodney F. Tonkovic, J.D.

Claims that Barclays PLC made its "dark pool" a magnet for high-frequency traders while issuing assurances that predatory traders would be blocked have survived a motion to dismiss. The plaintiffs claimed that Barclays made false representations about the transparency and safeguards of its "dark pool," the Barclays Liquidity Cross (LX), in violation of the antifraud and controlling persons provisions of the Exchange Act. The district court found that while Barclays’ alleged misstatements about its overall business practices were too general to be actionable, the specific statements about LX were actionable and were made recklessly (Strougo v. Barclays PLC, April 24, 2015, Scheindlin, S.).

Background. The class consists of purchasers of Barclays' American Depositary Shares between August 2, 2011, and June 25, 2014. The plaintiffs alleged that, contrary to its representations, Barclays not only allowed high-frequency traders in LX, but sought them out and gave them information that allowed them to take advantage of other traders. The plaintiffs asserted further that Barclays had a history of scandal and had vowed to change its governance related to conduct and reputation.

According to the complaint, in order to grow its dark pool, Barclays actively worked to attract high-frequency traders, resulting in LX eventually becoming one of the two largest dark pools in the U.S. At the same time, Barclays touted its safeguards, including a ratings system known as "liquidity profiling," claiming that it would refuse access to clients who engaged in aggressive, or "toxic," trading strategies. Barclays, however, never refused access and assigned "safe" ratings to traders that should have been rated as toxic. A former director described this profiling system as a "scam."

NYAG's complaint. The court noted that the complaint borrowed heavily from a June 2014 action filed under New York's Martin Act by the New York Attorney General. The defendants argued that the court should give no weight to allegations taken from this complaint because the matter has not been adjudicated and because the plaintiffs conducted no investigation. The court concluded that the plaintiffs were entitled to rely on the AG's complaint at this stage in the litigation, but that they also had an obligation under Rule 11 to eliminate any false allegations and to describe any independent investigations they have undertaken to verify the allegations.

Barclays' business practices. The court then found that Barclays’ statements about its business practices and risk controls were puffery and not actionable misstatements. This included Barclays' general statements about its practices, as well as the promises to reform made in the wake of the LIBOR manipulation scandal. According to the court, the complaint failed to connect the post-LIBOR scandal statements to the alleged LX fraud. Additionally, Barclays' promises were aspirational, and no reasonable investor would believe that they were a statement of current and ongoing compliance as of mid-2014.

Statements about LX. Turning to Barclays' statements about LX, including touting its safety while secretly encouraging predatory behavior, the court found that the complaint adequately pleaded materiality. While LX's portion of Barclays' overall revenue was small, the specific misstatements about LX called the integrity of the company as a whole into question, the court said.

Next, the complaint adequately pleaded that William White, Barclays' Head of Equities Electronic Trading, who made many of the statements at issue, acted with scienter. The complaint stated that a former Barclays director said that everybody knew that outliers were being manually removed from the toxicity framework. Given the nature of the fraud, the fact that it was common knowledge, and the importance of Barclays' reputation to its success, White either knew or should have known that its disclosure would harm shareholders, the court said. Finally, the court also imputed White's scienter to Barclays.

The case is No. 14-cv-5797.

Attorneys: Jeremy Alan Lieberman (Pomerantz LLP) for Barbara Strougo. Andrew Hunter Reynard (Sullivan & Cromwell LLP) for Barclays PLC, Barclays Capital, Inc., Bob Diamond, Antony Jenkins, Chris Lucas and Tushar Morzaria.

Companies: Barclays PLC; Barclays Capital, Inc.

MainStory: TopStory FraudManipulation NewYorkNews

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