New York Attorney General Eric Schneiderman is mistaking sharks for minnows in his crusade against Barclays' dark pool. He claims that the UK bank's equity e-traders misled savvy investors. The judge hearing the case is right to be skeptical.
It's a novel legal action under the Martin Act, New York's broad anti-fraud law. The AG accuses Barclays of touting the safety of its LX alternative trading system for ordinary investors when, in reality, it allowed "aggressive" high-frequency traders into the pool.
The case stretches the act to cover issues with the trading platform, not just the sales of securities on it. Schneiderman need not prove anyone meant to lie, but must show possible fibs were important to investors.
That's one point that has given New York State Supreme Court Justice Shirley Werner Kornreich pause. While declining to toss the suit, she noted that "highly sophisticated" investors probably weren't lured to LX by assurances they wouldn't face traders described with "meaningless" terms like "aggressive," "predatory" or "toxic." The AG, she said, would have to get a lot more specific.
It's reminiscent of other questionable Wall Street fraud claims. The US Securities and Exchange Commission, for instance, dinged Goldman Sachs $550 million in 2010 for allegedly hiding a hedge fund manager's bet against its Abacus CDO after he helped pick the instrument's underlying securities. Institutional investors argued they were deceived, despite knowing synthetic CDOs required long and short positions and, presumably, analysing the investment themselves.
Former Jefferies trader Jesse Litvak's contention that his fibs didn't matter to savvy customers has an appeals court rethinking his 2014 conviction. The court said he raised substantial questions "likely to result in reversal."
Arguing that "everyone lies" is no defence, of course, especially in an industry comfortable with half-truths and scant disclosure. And Fabrice "Fabulous Fab" Tourre, the Goldman banker who worked on the Abacus transaction, was found liable for fraud after a trial.
That was unusual, though. More often, government enforcers extract enormous settlements from banks and other corporate targets eager to avoid a costly fight. It's useful for the Barclays of the world to test prosecutors - especially those who wield powerful weapons like the Martin Act. Banks need to be held accountable, but big fish also bear responsibility for their own boneheaded bets.
It's a novel legal action under the Martin Act, New York's broad anti-fraud law. The AG accuses Barclays of touting the safety of its LX alternative trading system for ordinary investors when, in reality, it allowed "aggressive" high-frequency traders into the pool.
The case stretches the act to cover issues with the trading platform, not just the sales of securities on it. Schneiderman need not prove anyone meant to lie, but must show possible fibs were important to investors.
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It's reminiscent of other questionable Wall Street fraud claims. The US Securities and Exchange Commission, for instance, dinged Goldman Sachs $550 million in 2010 for allegedly hiding a hedge fund manager's bet against its Abacus CDO after he helped pick the instrument's underlying securities. Institutional investors argued they were deceived, despite knowing synthetic CDOs required long and short positions and, presumably, analysing the investment themselves.
Former Jefferies trader Jesse Litvak's contention that his fibs didn't matter to savvy customers has an appeals court rethinking his 2014 conviction. The court said he raised substantial questions "likely to result in reversal."
Arguing that "everyone lies" is no defence, of course, especially in an industry comfortable with half-truths and scant disclosure. And Fabrice "Fabulous Fab" Tourre, the Goldman banker who worked on the Abacus transaction, was found liable for fraud after a trial.
That was unusual, though. More often, government enforcers extract enormous settlements from banks and other corporate targets eager to avoid a costly fight. It's useful for the Barclays of the world to test prosecutors - especially those who wield powerful weapons like the Martin Act. Banks need to be held accountable, but big fish also bear responsibility for their own boneheaded bets.