The ongoing exchange of briefs between the New York Attorney General and Barclays in a lawsuit over the HFT sharks in a dark pool throws light on a number of ancillary subjects, including for example the NYAG’s continuing desire (a desire that the incumbent of that office shares with a number of his recent precursors) to expand the scope of the Martin Act. But one of the footnotes in the latest brief from the defendant rather steals the show.
Before we get there, let’s set the stage. The AG’s complaint contends that Barclays has misled institutional investors, customers of its dark pool, in the process easing the predatory behavior of high-frequency traders there. In short, the AG – Eric T. Schneiderman, believes that Barclays tempted naive fresh meat to swim into the pool, knowing it already had hungry sharks prowling about in there.
The complaint also alleges that a Barclays employee was terminated for being overly honest with the prospective suckers. The senior leadership of the Equities Electronic Trading division told this man not to disclose the results of a particular trading analysis, because the results reflected poorly on the fairness of the pool. The individual nonetheless shared with the Institutional Investor the analysis in question, and was promptly (the next day) fired.
Another employee was then pressured to “change crucial figures in the PowerPoint presentation.” Specifically, the original presentation would have shown that about 75% of all orders routed by Barclays to dark venues were internalized, that is, routed to Barclays’ own dark pool. The AG calls this number “extraordinarily high.” The implication here is that the first employee was fired for refusing to change the number [to 35%,] and the second more compliant employee did change the higher number to the lower.
In early August 2014, Barclays moved to dismiss the complaint, contending that the Martin Act only gives New York the authority to enforce fraud in the purchase or sale of securities, that it does not give any authority for enforcement in the operation or marketing of a trading platform or Alternative Trading System such as that at issue here.
Scope of the Martin Act
The NYAG filed a memo in opposition to that motion, relying upon language in the Martin Act that prohibits fraud designed to “induce or promote” the purchase of sale of securities, and arguing that this is very broad language. The maintenance of an ATS is presumably intended to induce parties to use it, and in some sense presumably promotes the sort of securities exchange for which it is to be used. Barclays supposedly engaged in fraudulent promotion when it “touted the safe and transparent services it offered as both a broker and operator of a trading venue.”
To this, Barclays has replied by arguing more recently, on October 7th, that the NYAG’s interpretation of the Martin Act is absurdly broad, expanding the scope of the act “beyond any meaningful limitation” and conflicting with “Congress’ objective of having the SEC establish uniform, national standards for ATSs.”
It is worth the parties’ while to hash this out in court, exposing the complexity of 21st century federal-state relations, and the always beloved ambiguities of statutory language at both levels. But perhaps the most intriguing revelation in the exchange is a footnote (n. 13, for those who like to keep track of such things) in which Barclays seems to concede that an employee was pressured to change the internalization number. At least, they pointedly don’t argue with that.
Footnote 13 denies that an employee was “fired” for failing to change the number (and it puts the word “fired” in quotes here): the employee was RIFed. That is, he was subjected to a reduction-in-force that had “commenced well in advance of the alleged presentation.”
An ‘Alleged’ Presentation?
The word “alleged” here is grating. If one knows for a fact that something “commenced” prior to a certain event, then one also must know for a fact that such a later event did occur, and on what date it did occur. One doesn’t know that a RIF was instituted prior to hell freezing over because (idioms to the contrary) none of us on earth are aware of the reality or proper chronology of that event. Surely Barclays’ lawyers are conceding that there was some such presentation, and that a relevant employee was RIF-ed in the days leading up to that event or they are saying nothing at all.
So, did the number get changed from 75% to 35% for the presentation or didn’t it? Footnote 13 continues, refusing to address that question because it would matter only to “a single presentation to a single customer of LX…” whereas the Martin Act requires harm to a “substantial segment of the state’s population,” under People v. Grasso (2008).
My own guess – the lawyers involved in the preparation of this brief are aware of their responsibility not to mislead a court, even in the sacred name of advocacy. So they don’t want to deny that the number was changed when it was, in fact, changed. Thus, all the talking-around in this footnote and its environs makes some sense: the careful distinction between a firing and a RIF, the odd use of the word “alleged,” and the argument over how a single presentation can’t do a lot of harm.
All of this sounds like an important concession. Somebody at Barclays changed a number in a presentation to make it appear that Barclays’ internalization rate was respectably low. And did so immediately after another employee, one who had refused to do just that was … well, no longer showing up at the office each day.