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From Securities Regulation Daily, February 24, 2016

SIFMA opposes class certification in dark pool lawsuit against Barclays

By Amanda Maine, J.D.

The Securities Industry and Financial Markets Association filed an amicus brief with the Second Circuit asserting that the district court improperly certified a class action against Barclays Bank over misrepresentations it made about a dark pool it operates. According to SIFMA, the Southern District of New York misapplied precedent regarding the presumption of reliance and the disaggregation of damages in certifying the class (Barclays Bank PLC v. Strougo, February 23, 2016).

Class certification. The district court granted certification of a class action alleging that Barclays made misrepresentations and omissions regarding its private trading venue, or "dark pool," known as "Liquidity Cross" or "LX." According to the lawsuit, Barclays gave high-frequency traders information that allowed them to take advantage of other traders and concealed the amount of aggressive high-frequency trading in LX. The lower court found that the plaintiffs had shown that common issues predominate under Rule 23(b)(3) because they had established reliance on a class-wide basis under both the Affiliated Ute and Basic v. Levinson Supreme Court decisions.

Affiliated Ute objection. Arguing against class certification, SIFMA said that the district court’s order was premised on the mischaracterization of the plaintiffs’ alleged misrepresentations as omissions, entitling it to Affiliated Ute presumption of reliance. SIFMA argued that the Affiliated Ute presumption was applied here by characterizing misstatements as "omissions of the truth." This rationale would expand the Affiliated Ute presumption of reliance to cover virtually all cases, and not just those primarily based on omissions, according to SIFMA. It noted that the rationale for the Affiliated Ute presumption is due to the impossibility to demonstrate reliance on "instances of total non-disclosure." Expanding it to "omissions of the truth" that are essentially misleading statements ignores this rationale, SIFMA explained.

Basic objections. SIFMA also argued that the lower court erroneously held that the plaintiffs could demonstrate that the stock at issue traded in an efficient market without submitting a study showing a causal relationship between unexpected news and market price. It was sufficient to prove market efficiency by submitting indirect evidence such as high volume trading on a national market with heavy coverage, the lower court stated.

According to SIFMA, this was an incorrect test of market efficiency. Under this theory, a plaintiff would not need to submit evidence of such a causal relationship in future litigation, granting plaintiffs a "get out of jail free card" when it comes to showing market efficiency.

SIFMA also noted that the plaintiffs’ own expert performed a regression analysis showing that the allegedly misleading disclosures had no impact on stock price. SIFMA argued that the defendants had shown that this analysis rebutted the presumption of reliance under Halliburton II.

Damages. Finally, SIFMA asserted that the court’s certification order is inconsistent with the Supreme Court’s decision in Comcast Corp. v. Behrend because the plaintiffs failed to separate damages resulting from the allegedly misleading statements from those attributable to other causes, meaning they failed to satisfy the predominance requirement. This "arbitrary" model of class damages "would reduce the predominance requirement to a nullity," SIFMA warned, citing the Supreme Court’s concerns regarding similar circumstances that led to the Comcast decision.

Conclusion. SIFMA noted that the lower court’s opinion was part of a "developing, erroneous trend" in the Southern District of New York that, if allowed to proceed, would afford securities litigation plaintiffs "a virtually unchallengeable path to class certification." In the interest of setting clear class certification standards, SIFMA urged the Second Circuit to grant the defendants’ petition for review.

The case is No. 16-0450.

Attorneys: Jeffrey Thomas Scott (Sullivan & Cromwell LLP) for Barclays Bank PLC and Barclays Capital Inc. Jeremy Alan Lieberman (Pomerantz Grossman Hufford Dahlstrom & Gross LLP) for Barbara Strougo.

Companies: Barclays Bank PLC; Barclays Capital Inc.

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