Counsel Kate Gee and Associate Asees Johar explore allegations by institutional investors against Barclays relating to how its ‘dark pool’ trading platform was operated and whether it left its clients vulnerable to harmful practices of high-frequency traders.
Kate and Asees’ article was published in Financier Worldwide, 28 April 2022, and can be found here.
Barclays is facing a group litigation in the English courts brought by hundreds of institutional investors in relation to fraud allegations originally made in the U.S. It was alleged in the U.S. that Barclays knowingly made systematic misrepresentations in relation to how and for whose benefit its ‘dark pool’ trading platform was being operated and left its clients vulnerable to the predatory trading practices of high-frequency traders. This action forms part of the continued rise in securities litigation, and the growing momentum behind shareholder class actions in the UK, similar to U.S.-style ‘stock-drop’ lawsuits.
This case relates to Barclays’ ‘dark pool’ trading platform, a form of alternative trading system to the major stock exchanges. A dark pool is a private securities exchange in which investors, typically large financial institutions, can trade anonymously without exposure until the trade has been executed and reported. As it often the case, the factors that make something so appealing can also be those that bring the greatest risks: the lack of transparency leaves dark pools susceptible to conflicts of interests by their operators, and open to predatory trading practices by high-frequency traders. These high-frequency traders are theoretically able to engage in front-running once they become aware of others’ trading intentions ie upon learning that another trader is about to buy or sell stock, the high-frequency trader buys or sells the stock first then immediately sells it to that trader at a higher price.
The case originates from a complaint filed by the New York Attorney General in June 2014, regarding Barclays’ ‘dark pool’ trading platform, Barclays LX. Barclays was accused by the Attorney General of “a systematic pattern of fraud and deceit” over its operation of the platform. It was further alleged that these misrepresentations misled investors, gave high-frequency traders an unfair advantage, and failed to safeguard Barclays’ other clients, whom the bank was supposed to protect from this precise risk.
When the lawsuit was filed, Barclays’ share price fell by 7.38% the next day, largely due to uncertainty surrounding potential financial penalties should the allegations prove to be correct, as well as the potential impact on Barclays’ investment banking division.
In January 2016, Barclays admitted wrongdoing and, specifically, admitted to violating federal securities laws in its operation of the platform, by making numerous material misrepresentations to investors including as to:
- How Barclays monitored its dark pool for high-speed predatory trading. Investors were assured that Barclays continuously used sophisticated monitoring tools to police for predatory trading and ran weekly surveillance reports, which it did not.
- A service provided by Barclays which it claimed was designed to enable traditional investors to opt-out of trading with the most aggressive high-speed traders in the dark pool. Instead, this service provided exceptions for favoured high-speed clients, which meant that traditional investors who thought they were trading against only the safest counterparties were actually trading with some of the most aggressive and predatory traders in the pool.
- The ‘Liquidity Profiling’ rating of Barclays’ internal high-frequency trading desk. The bank overrode the rating to give the appearance of a ‘safe’ trading partner, even though internally Barclays knew it to be one of the most predatory.
- Barclays’ inaccurate and incomplete analysis of the dark pool trading, which was circulated to its investors over several years. Barclays purposefully omitted the largest and most aggressive traders from these analyses, to make the platform appear safer than it truly was.
- The type and number of market data feeds which Barclays used to price trades in its dark pool. The bank repeatedly informed investors that it used the quickest feeds from all major exchanges, which it did not.
Barclays was required to pay a USD 70 million fine, comprising USD 35 million paid to the U.S. Securities and Exchange Commission and USD 35 million to the New York Attorney General. These were some of the largest penalties ever imposed on a bank for dark pool-related securities violations, and Barclays were additionally required to appoint an independent monitor to ensure proper operation of its electronic trading division going forward.
A securities fraud class action was subsequently brought against Barclays in the U.S. on behalf of a class of investors who had purchased Barclays American depository shares, and who claimed to have lost money following the fall in share price after the lawsuit was filed. It was alleged that Barclays violated federal securities laws by making misrepresentations or omitting material facts in public statements made to investors, regarding its dark pool. While Barclays denied these allegations, and denied that the plaintiffs suffered damages or were harmed by the alleged conduct, the class action eventually settled, with Barclays paying out USD 27 million to those of its investors who purchased shares during the relevant period.
What brings the claim to England?
Barclays now faces a group litigation in the English courts (in the Financial List) brought by hundreds of institutional investors over these same fraud allegations, with the investors seeking damages in respect of the fall in share price. It is understood that the claim is brought on the basis that, had the investors known the truth about the way in which the ‘dark pool’ was run, the lack of governance, and the misrepresentation of information with regards to it, they would either not have bought Barclays’ shares, or at least not at the price they paid for them.
Pleadings have closed, and – if the Court determines at the CMC that the case is ready to proceed to trial – the next step will be for the claimants’ lawyers to propose a group of sample claimants, who will represent the wider group of investors going forward.
Future of securities litigation
Securities litigation is already well-established in the U.S., with an experienced claimant industry and a history of successful settlements producing both compensation for investors and significant revenues for those managing the cases. Although 2020 and 2021 saw a decline in filings of securities class actions in the U.S., these have been projected to once again increase in 2022, not least owing to issues surrounding cryptocurrency, special purpose acquisition company (SPAC) transactions as well as event-driven securities litigation.
The UK has too started to see a rise in shareholder class actions over the past few years, with the UK increasingly seen as a favoured jurisdiction for such actions. The RBS Rights Issue Litigation was widely considered the watershed event in the development of collective shareholder litigation in the jurisdiction, notably followed by Lloyds/HBOS Litigation, the Tesco Litigation, and others. Correspondingly, we have also seen the development of a sophisticated market of claimant law firms in the UK, well-versed in successfully bringing, managing and funding similar claims.
It is expected that this rise in securities-related group litigation will continue, driven by a focus on access to justice and consumer protection, and assisted by Group Litigation Orders, which enable claimants with common or related issues of fact or law to join a group litigation on an ‘opt-in’ basis.
This type of litigation will also be assisted by market volatility caused by the Covid-19 pandemic, and the decisions made by many companies in light of widespread uncertainty and significant losses. These decisions may include having produced misleading statements regarding the company’s financial health and shareholder dividends, as well as future performance and growth, which shareholders would be wise to monitor. Other potential drivers for such litigation include the introduction of new data legislation, as well as the Competition Appeal Tribunal beginning to approve applications for collective proceedings orders under the Consumer Rights Act 2015.
All the above is supported by increasingly advanced technology as well as increasingly complex funding models, both of which make the management of such cases less complicated and less costly. There continues to be an increasing appetite for, and acceptance of, litigation funding, the market for which roughly doubled between 2018 and 2021, and continues to grow, with funders actively seeking potential opportunities following signs of share price volatility. The increased use of ATE insurance has additionally reduced the potential downside of bringing high-value and complex shareholder claims by removing a significant amount of the cost exposure.
Sylvie Gallage-Alwis and Nikita Yahouedeou discuss the DGCCRF’s recent practical guide to online shopping and consumer rights in Le Monde du Droit
28 November 2023
28 November 2023