By Ben Bedell, From New York Law Journal

The New York Attorney General’s securities fraud case against Barclays Capital, alleging it misrepresented the benefits of its “dark pool” trading platform, can go forward, a Manhattan Commercial Division judge ruled Friday.
But Justice Shirley Werner Kornreich (See Profile) warned that she found some of the state’s claims “unconvincing.”
Ruling on an issue she described as “novel,” Kornreich disagreed with Barclays’ contention that “misrepresentations about the platform or venue through which securities are traded cannot give rise to liability under the Martin Act,” New York’s broad securities fraud statute, because the act is restricted to securities and not trading platforms.
When investors chose to execute their trades in a dark pool “because trading on that platform was thought to directly impact the outcome of the trades,” Kornreich said, “their decision to trade in the dark pool is very much an investment decision.”
The case, State v. Barclays Capital, 451391/2014, was brought by Attorney General Eric Schneiderman last year, alleging that Barclays is liable for false and misleading statements made to large financial institution clients about “Barclays LX,” its dark pool platform.
A dark pool is “a private securities trading platform used to execute securities trades anonymously, unlike public exchanges, such as the New York Stock Exchange,” said Kornreich.
The widening use of dark pools to carry out algorithmic trading strategies referred to as “high-frequency trading” was the subject of Michael Lewis’ bestseller, “Flash Boys: A Wall Street Revolt.”
Kornreich said her ruling took into account that “the type of fraud alleged here was carried out by highly sophisticated financial experts and harmed highly sophisticated financial experts,” and thus “cannot be viewed from the perspective of a layperson.”
She asserted, however, that she “need not and will not weigh in on the important public policy debate over market structure, as such matters have no legal relevance to this case. High-frequency trading is a fact of life on Wall Street, and it is up to the federal securities regulators and Wall Street experts to determine sound market structure policy.”
She added that “this lawsuit is not, nor could it be, about the legality of the trading in the dark pool.”
Rather, Kornreich said, the case is about whether Barclays lied to investors “about material facts about how their dark pool operates” and said she would not credit the state’s “rhetoric about the harms of [high-frequency trading].”
Kornreich also expressed skepticism about the merits of the state’s claim, while saying any ruling would come on a summary judgment motion now being briefed by the parties.
Kornreich said “no Martin Act liability will be found unless Barclays actually lied to investors, in writing, about material facts concerning the dark pool.”
She cautioned that the investors in the dark pool at issue “are highly sophisticated and, hence, no liability will be found simply on the basis of meaningless words,” or “puffery” in Barclays sales materials.
A graph submitted by Schneiderman as evidence of fraud “clearly does not represent what the NYAG says it does,” Kornreich said, and draft PowerPoints made for sales presentations that the state said were edited in a way that was evidence of fraud, “should not give rise to fraud liability.”
While acknowledging the question of the Martin Act’s reach was a “close call,” the opinion said, “New York, the center of the financial universe, benefits greatly from having powerful blue sky laws.”
Jeffrey Scott, a partner at Sullivan & Cromwell, is the lead attorney for Barclays. He did not respond to a request for comment.
Assistant Attorney General Chad Johnson represented the Attorney General’s Office.
Liz DeBold, a spokeswoman for Schneiderman, said: “We are pleased the court affirmed our ability to pursue a claim against Barclays.”
IMAGE: Paul Giamou/iStock
For more on this story go to: http://www.newyorklawjournal.com/id=1202718130922/AG-Case-Against-Barclays-Over-Dark-Pool-Goes-Forward#ixzz3S7EvDGXD