January 22, 2015 / 1:16 AM / 3 years ago

New York says Barclays not cooperating in 'dark pool' probe

Logos are seen outside a branch of Barclays bank in London July 30, 2013.Toby Melville

NEW YORK (Reuters) - New York's top law enforcer on Wednesday accused Barclays Plc of defying his subpoenas in a probe of high-speed trading in its private "dark pool," and moved to expand his lawsuit accusing the British bank of fraud.

Barclays quickly fought back, accusing state Attorney General Eric Schneiderman of overreaching, and scrambling to fix a lawsuit that it said was fatally flawed to begin with.

In a proposed amended complaint, Schneiderman said Barclays has refused to let its top equities electronic trading executives, electronic trading chief William White and head of product development David Johnsen, answer his questions even though both have been subpoenaed.

Schneiderman also said both men were "directly involved in, and oversaw" much of a fraud in which Barclays gave high-frequency traders an unfair advantage, and harmed other clients and investors by promising to forbid the kind of "predatory" and "toxic" trading it was allowing in its dark pool.

A Feb. 11 hearing is scheduled in the New York State Supreme Court in Manhattan over whether Schneiderman may proceed with his amended complaint.

The presiding judge, Shirley Kornreich, last month questioned the strength of the original complaint, which was filed June 25 and which Barclays wants dismissed.

Barclays on Wednesday night moved to quash the subpoenas.

It claimed in a court filing that Schneiderman was using them in a "fishing expedition" to fix defects in a lawsuit that the proposed amended complaint "in no way cured."

The bank also denied being uncooperative in the probe, saying in a statement it will "continue to seek to cooperate" with Schneiderman even as it defends against his claims.

A spokeswoman for Schneiderman declined to comment.

Dark pools were designed to quietly trade shares before investors in the broader market could learn about and bet against the trades. They can be cheaper to use than exchanges.

Schneiderman's lawsuit is among the highest-profile cases as regulators probe the fairness of high-speed, automated trading practices and alternative trading systems.

The attorney general claimed that Barclays used its dark pool to boost revenue and bonuses, and in doing so violated the state's Martin Act, a powerful anti-fraud law.

In his amended complaint, Schneiderman said Barclays falsely told clients from 2012 to 2014 that its algorithms gave no advantage to particular trading venues or client orders, despite having reprogrammed those algorithms to favor the dark pool.

He also said Barclays "did not police" that pool, telling investors that 6 percent to 9 percent of trading activity was "aggressive" when it knew the amount was closer to 25 percent to 30 percent.

Schneiderman also said Barclays made a false statement in an October court filing, when it indicated that it had banned a high-frequency trading firm from its dark pool in June 2012.

The attorney general said Barclays actually let the firm, GTS Securities LLC, trade millions of shares a day afterward.

A GTS spokesman did not respond to a request for comment.

The case is Schneiderman v. Barclays Capital Inc et al, New York State Supreme Court, New York County, No. 451391/2014.

Reporting by Jonathan Stempel; Additional reporting by Karen Freifeld and Herb Lash; Editing by Lisa Shumaker and Bernard Orr

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