Barclays Capital Inc. and Barclays PLC is seeking dismissal of a lawsuit by the New York attorney general, alleging that the British bank had deceived customers in its “dark pool,” which is essentially a private securities exchange.
Barclays filed a motion for dismissal yesterday with the New York State Supreme Court a month after New York Attorney General Eric T. Schneiderman filed the New York’s lawsuit.
The 42-page Barclays document asserts that New York “fails to identify any fraud — establishing no material misstatements, no identified victims and no actual harm.” In addition, it contends that the lawsuit is based on “clear and substantial factual errors.”
Practitioners in the indexed insurance products industry may be glad to learn that Barclays is responding to the lawsuit by first trying to have the suit dismissed. This is because they would prefer that the Barclays name not be drawn into protracted, high-profile litigation with New York.
This preference relates to the fact that the Barclays name appears on some indexed allocation options offered inside of certain indexed annuities. Barclays is a well-recognized and regarded brand in financial circles, and index choices bearing that name have soared in popularity in the last year.
Industry professionals point out that indexed annuity allocation options are financial measurements that insurance companies use in calculating whether and how much interest to credit to a policy. The options are not securities or part of any exchange. However, the concern is that indexed annuity consumers may overlook the distinction if adverse publicity involving the name of Barclays — or any other index used for allocation options — emerges.
In its motion, Barclays does not refer to its private securities exchange as a “dark pool.” The bank said Barclays LX (the formal name of the exchange) is an alternative trading system used by highly sophisticated investors.
The New York attorney general alleged that Barclays had misled investors by promising, in its marketing, to protect its exchange investors from predatory trading behavior even while allowing high-frequency traders to populate the pool. The state also accused Barclays of operating its dark pool to favor high-frequency traders.
The Barclays motion details three main reasons why the court should dismiss the lawsuit:
- The New York Attorney General is seeking to extend its regulatory authority to trading platforms, even though only the U.S. Securities and Exchange Commission has, to date, regulated alternative trading systems, Barclays said. New York “ignores that the plain text of the Martin Act — on which the NYAG’s claims are predicated — is limited to actions for fraud in the purchase or sale of ‘securities,’ and does not extend to all actions related to finance.”
- “The New York claims fail on the merits,” Barclays said, citing New York’s failure to disclose particulars such as which Barclays’ clients saw the “supposed misstatements” and when, “whether the marketing flyer and news quotes were material to those clients…and whether those clients were harmed by them.”
- The complaint “wrongly seeks damages and restitution” without alleging that the people in New York or LX clients actually suffered harm.
Barclays also said the New York complaint ignores that the system’s customers “are highly sophisticated traders and asset managers responsible for investing millions or billions of dollars of assets…(who are) capable of closely monitoring the quality of execution they receive based on extensive data.”
These investors can select their trading platforms “based on detailed execution data, not on the glossy marketing brochures or quotes from magazine articles the NYAG cites,” it said.
Although it is seeking dismissal, Barclays indicated in the motion that it is prepared to fight the New York allegations if it comes to that. Pleading standards limit Barclays’ ability to rebut the factual errors, Barclays said. “But should this litigation proceed to the next stages, Barclays will introduce evidence demonstrating how far off base these allegations are.”
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