Barclays has now come out with their first response to the lawsuit filed by the New York Attorney General Eric Schneiderman, accusing them of lying about their dark pool platform, Barclays LX. They are requesting a dismissal of the case.
Barclays has chosen a three-pronged defence to try and get the lawsuit dismissed. At first glance it looks rather compelling:
- A technicality
- Factual errors
- The Big Mac defence.
Barclays' lawyers argue that the lawsuit should be dismissed because it was filed under the Martin Act which, according to Barclays, "is limited to actions for fraud in the purchase or sale of "securities," and does not extend to all actions related to finance."
In other words, because Barclays only provided the platform - in this case their dark pool – they cannot be charged under the Martin Act.
Now, I'm no lawyer, but I am wondering if Barclays' lawyers have done their homework.
If you read the Martin Act (also known as New York General Business Law Article 23-A sections 352-353) it's very clear on who and what it covers in matter related to fraud.
"...engage in any practice or transaction or course of business relating to the purchase, exchange, investment advice or sale of securities or commodities which is fraudulent or in violation of law and which has operated or which would operate as a fraud upon the purchaser."
It's right there- clear and transparent as an extra dry martini "any practice or transaction or course of business relating to...". Notice the keyword "relating". Compare that to Barclays' argument that the Martin Act "does not extend to all actions related to finance".
A dark pool is business set up to enable the trading of securities, how is that not a "business relating to the purchase, exchange... or sale of securities"
This makes one wonder if anyone at Barclays has even bothered to read the Martin Act?
Barclays goes on to refute the claims that it lied to its clients by stating that the "complaint is based on clear and substantial factual errors. Unfortunately, at this stage of the litigation, the pleading standards limit Barclays' ability to rebut those factual errors".
Barclays is saying that the New York Attorney General is incorrect in their accusation, but they won't say why- just now.
Barclays are in fact asking the judge to trust them because they are lawyers ... lawyers for bankers.
The Big Mac Defence
We all know that when you go to a fast food restaurant, the lovely picture of the hamburger (promised to you in the pictures) differs significantly in appearance from the actual hamburger you get to eat.
This is exactly what Barclays bases its request for dismissal upon.
According to Barclays their clients were "highly sophisticated traders and asset managers" who knew not to base their trading decisions "on the glossy marketing brochures or quotes from magazine articles"
Is Barclays telling the world that if it produces a glossy brochure, clients should not believe what they read?
This sounds more like an admission of guilt than a defence.
What Happens Now?
Since the request for dismissal came as a surprise to some it can be viewed as Barclays coming out fighting with gusto. However, reading the actual document from Barclays, it feels more like they are going through the motions, while the lawyers are clocking up billable hours.
Barclays' only real consolation is that the New York Attorney General doesn't want a prolonged case.
Most asset management chief financial officers have little knowledge of how an order is handled and what happens to it, in the fractions of a millisecond, from the moment an order is sent to market and when it is executed.
With a subject so little understood, by even the experts in the financial field, how could a jury ever comprehend the complexities, let alone stay awake during a trial?
So what happens next?
The most likely outcome is that Barclays will settle with the New York Attorney General, before it goes to court, as the half-hearted defence by Barclays only strengthens that view.
The author is a former senior private banker with a wealth of experience in multi-asset portfolio management and writes anonymously.