Barclays Asks Judge to Throw Out New York Dark Pool Suit

New York Attorney General Eric Schneiderman’s lawsuit accusing Barclays Plc of bilking customers to expand its dark pool was scrutinized by a judge for not naming specific victims of the alleged fraud.

New York State Supreme Court Justice Shirley Werner Kornreich asked a Schneiderman deputy at a hearing Thursday in Manhattan about a parallel lawsuit by investors in federal court over similar allegations. The judge said she found the state’s suit hard to follow, adding that the complaint cited trade journals and newspapers as evidence of the bank’s misleading statements and not alleged victims.

“It’s hard for me to believe that a very sophisticated investor would base his choice of investment platform on a newspaper article,” Kornreich said.

Schneiderman sued Barclays in New York State Supreme Court in Manhattan in June, accusing it of lying to customers and hiding the role of high-frequency traders. The bank in July filed papers asking the court to throw out the case, arguing the state hasn’t shown that clients have been harmed.

New York has sought a leading role in reforming equities trading in the $23 trillion U.S. stock market, partly by examining whether dark pools -- private stock markets usually operated inside large banks -- give unfair advantages to high-frequency traders. Private venues such as dark pools now handle almost 40 percent of the volume of equity markets.

Dark Pools

Unlike exchanges such as the New York Stock Exchange, dark pools keep the supply and demand private until after a trade is executed. While that can help investors get better prices by masking their strategies, the opaqueness fuels suspicion that dark pools’ owners don’t treat some customers fairly.

Jeffrey T. Scott, a lawyer with Sullivan & Cromwell LLP representing the bank, told Kornreich Thursday that the state hasn’t complied with the 1921 Martin Act anti-fraud statute requiring the attorney general’s office to identify specific investors who were damaged by the alleged activity.

“I don’t know what clients they are talking about,” Scott said. “They haven’t identified anybody.”

Deputy Attorney General Chad Johnson called the suit a “classic Martin Act case.” He told Kornreich the statute covers activity that can affect any securities transaction -- whether it actually takes place or not -- and doesn’t require the state to show that specific investors were harmed.

Martin Act

“The point of the Martin Act is to enforce the laws of New York, which broadly prohibit any scheme, any device, any transaction which can have an effect on securities transactions,” Johnson said.

In the Barclays case, he said, “You’ve got false documents, misrepresentations, the failure of the broker-dealer to act on the part of their clients and impact on the securities transactions that it was handling on the behalf of their clients.”

The judge noted that a similar lawsuit has been brought in federal court by Barclays investors, including large institutions and sophisticated individuals, over claims that the bank hid the role of high-frequency traders in the dark pool.

Elliot Stein, an analyst with Bloomberg Intelligence, said the hearing “practically flipped the burden of proof” to the attorney general’s office. The judge appears inclined to dismiss the suit and may do so early next year, possibly with a chance for Schneiderman to refile it with more specific allegations, said Stein, who is a lawyer.

Federal Lawsuits

A panel of federal judges ruled this week that the five cases against London-based Barclays will be consolidated before a federal judge in New York to make pretrial information exchanges quicker and less costly.

Johnson said his office often brings cases with parallel private actions, like those in federal court, and that the plaintiffs in those suits will face hurdles that won’t be an issue in Schneiderman’s.

The judge said she will rule later on the bank’s motion to dismiss the suit.

The case is New York v. Barclays Capital Inc., 451391/2014, New York State Supreme Court, New York County (Manhattan).

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