Barclays Executives Identified in New Dark Pool Complaint

(Bloomberg) — Several Barclays Plc executives were aware that the bank was falsely representing how algorithms in its dark pool worked and how client orders were routed, according to an amended complaint prepared by New Yorks attorney general.

The complaint marks the first time that executives at Britains second-largest bank have been identified in New York Attorney General Eric Schneidermans suit claiming that the bank misled customers of its in-house trading system.

The latest filing provides one of the most specific assertions yet by a law enforcement official about unfair playing fields inside dark pools, lightly regulated private venues where about 17 percent of trading took place as of October, according to Rosenblatt Securities. At Barclays, Schneiderman said, irregularities were systematic.

See the Compliant Here

The wrongdoing at issue was not limited to a few isolated incidents, nor was it the result of a few rogue employees, Schneiderman said in the new complaint. This was a broad course of conduct involving numerous Barclays employees.

Two of the executives whose names appear in the amended complaint are William White, head of the banks electronic equities trading division, and his number two, David Johnsen, head of product development, according to the document that Schneiderman is seeking to file in state court in Manhattan.

The two arent named as defendants but are described as playing lead roles in the development and marketing of electronic trading services. Another dozen executives are also mentioned in the complaint.trading platform to boost its own profits.

The latest filing provides one of the most specific assertions yet by a law enforcement official about unfair playing fields inside dark pools, lightly regulated private venues where about 17 percent of trading took place as of October, according to Rosenblatt Securities. At Barclays, Schneiderman said, irregularities were widespread.

The wrongdoing at issue was not limited to a few isolated incidents, nor was it the result of a few rogue employees, Schneiderman said in the new complaint. This was a broad course of conduct involving numerous Barclays employees.

Two of the executives whose names appear in the amended complaint are William White, head of electronic trading, and his number two, David Johnsen, head of product development, according to the document that Schneiderman is seeking to file in state court in Manhattan.

The two arent named as defendants but are described as playing lead roles in the development and marketing of electronic trading services. Another dozen executives are also mentioned in the complaint.

The bank refused to make two executives available for depositions under subpoena, according to the complaint. Those two were White and Johnsen, according to a person familiar with the investigation, who asked not to be identified because the matter is confidential.

Barclays spokesman Mark Lane said the bank wouldnt make White or Johnsen available for comment. The bank filed a motion to quash the subpoenas for the two executives Wednesday.

Defend Vigorously

The amended complaint merely repackages the same flawed arguments that were in the original complaint, Lane said in an e-mailed note. While we continue to seek to cooperate with the New York Attorney General in this matter, we will continue to defend vigorously against these allegations.

Schneiderman sued the London-based bank in June, saying it engaged in a pattern of fraud and deceit starting in 2011 that bilked its own customers in order to expand its dark pool.

The bank in July asked the court to dismiss the case, saying that the suit is based on factual errors and fails to show any investors were harmed.

The New York Attorney Generals office has taken more than 100,000 documents from Barclays since the original complaint was filed, the person familiar with the probe said.

Widespread Pattern

The amended complaint includes detailed e-mails between Barclays employees that the New York attorney general claims show a widespread pattern of deceiving clients.

The complaint alleges that Johnsen ordered another Barclays employee to insert a slide into an upcoming presentation to be delivered to an industry conference, in order to convey that Barclays was not routing trades preferentially to itself first – – despite the fact that Barclays was doing exactly that.

The complaint says Barclays routed orders to its own dark pool first, regardless of whether the client could get a better price through another venue. Barclays assured investors they were protected from high-frequency trading strategies that it characterized as toxic, predatory, or aggressive.

Trading Partners

Barclays was doing deals left and right with the high frequency firms to invite them into the pool to be trading partners for the buy side, the complaint cited a former employee as saying. The employee added the pool was mainly made up of high-frequency trading firms.

As early as 2011, employees were working on plans to rewrite an electronic trading algorithm to favor Barclayss dark pool, Schneiderman said in the complaint. Another electronic trading services executive sent a document titled 2011 Goals in January 2011 to White describing such a plan, according to the complaint.

The new complaint fleshed out several episodes that were referred to in the June document. According to the earlier complaint, after a Barclays director in 2013 prepared to disclose an analysis to an unnamed institutional investor showing that a high number of the investors trades were going to Barclays dark pool, he was fired. White was the person who fired the director, according to the new complaint.

In another example, Barclays removed evidence from a presentation of high-frequency trading firm Tradebot Systems Inc.s presence in a dark pool. That action was taken after the banks compliance department had approved the document and without its knowledge, Schneiderman said.

Fuels Suspicion

Dark pools are private stock markets usually operated inside large banks. Unlike in exchanges such as the New York Stock Exchange, supply and demand is kept private until after a trade is executed. While that can help investors get better prices by masking their strategies, the lack of transparency fuels suspicion that dark pool owners dont treat some customers fairly.

Dark pools have come under increasing scrutiny in the past year from the Securities and Exchange Commission in addition to Schneiderman, who has sought a leading role in making equities trading in the $23 trillion U.S. stock market more transparent and examining whether exchanges and dark pools give unfair perks to high-frequency traders.

Schneidermans office filed a motion seeking approval from the judge to file the amended complaint today. The complaint is attached to the filing as an exhibit.

The case is New York v. Barclays Capital Inc., 451391/2014, Supreme Court of the State of New York, County of New York.