Last week, the New York Supreme Court denied Barclays’ motion to dismiss the New York Attorney General’s fraud claim against the bank, finding that the NYAG may proceed with its claim under New York’s Martin Act based on alleged misrepresentations about Barclay’s “Dark Pool” alternative trading platform.  The Court granted Barclays’ motion to dismiss the NYAG’s claim that Barclays violated New York Executive Law Section 63, finding it does not create an independent cause of action.  People of the State of New York by Eric T. Schneiderman v. Barclays Capital Inc., No. 451391/2014, 2015 WL 641803 (N.Y. Sup. Ct. Feb. 13, 2015).

The Attorney General’s suit was filed after publication of Michael Lewis’ book “Flash Boys,” which portrayed “high frequency trading” (HFT), or high-speed trading based upon computer algorithms, as a scam rigged to benefit insiders trading on public exchanges and to cheat ordinary investors.  The NYAG alleged Barclays violated the Martin Act by misleading clients into believing its “Dark Pool” alternative trading platform would protect them from high frequency trading, when, according to the NYAG, the platform was designed to allow high frequency traders to prey upon them.

The Martin Act authorizes the NYAG to sue based on fraudulent practices in the marketing, purchase or sale of stocks, bonds and other securities.  See N.Y. Gen. Bus. Law § 353; Assured Guar. (UK) Ltd. v. J.P. Morgan Inv. Mgmt. Inc., 18 NY3d 341, 349 (2011).  Barclays argued that the Martin Act did not apply because the alleged misrepresentations did not relate to the sale of any particular security but related only to the Dark Pool itself.  The court rejected that argument.  Acknowledging that it was faced with a novel issue, the court found that the alleged misrepresentations concerned investors’ decisions about where to execute trades and were therefore sufficiently connected to the buying and selling of securities that the NYAG could bring suit under the Martin Act.

The court’s decision may sound like good news for the NYAG.  It may also cheer plaintiffs’ attorneys pursuing claims against alternative trading platforms and public exchanges, alleging they have allowed those engaged in HFT to exploit other market participants.  But the ruling is not as favorable to plaintiffs as it first appears.

As an initial matter, the decision did not address the sufficiency of the NYAG’s pleading of a claim under the Martin Act.  It only determined that the Martin Act applies.

More important, Justice Shirley Kornreich went out of her way in commentary to make clear she is not buying the Attorney General’s “rhetoric about the harms of HFT,” stating that it “should be unconvincing to sophisticated readers due to the absence of any meaningful discussion of the complex trade-offs that must be considered when contemplating market structure policy.”  The court cited in support of its skepticism of the AG’s rhetoric a Bloomberg article summarizing a speech by SEC chair Mary Jo White, which asserted that “The SEC’s core view is that the fundamental business model of high frequency trading is fine.”  Kornreich even hinted she saw potential benefits from HFT to participants in Barclays’ trading platform.  “One wonders … if not for the existence of HFT in the Dark Pool, whether these investors could possibly have processed their desired order volume[.]”

Despite Justice Kornreich’s skepticism that HFT is all bad, her determination that marketing of a trading platform is sufficiently connected to the buying and selling of securities to fall under the Martin Act could open the door to more claims of securities fraud in connection with alternative trading platforms.

There are already multiple class action suits currently pending in the Southern District of New York that assert claims against public exchange platforms and alternative trading platforms for purportedly allowing high-frequency traders special access to trading information.

Several of these suits have been consolidated into a Multi-District Litigation (MDL), City of Providence v. BATS Global Markets, Inc., et. al., 14-md-02589.  Plaintiffs have brought suit on behalf of all investors that bought or sold equities in the U.S. on a registered public stock exchange or the alternative trading platform operated by Barclays.  Plaintiffs allege that defendants, nationally registered U.S. securities exchanges and Barclays, violated the U.S. securities laws by engaging in a scheme with HFT firms to defraud investors.  Defendants moved to dismiss the complaint on January 23, 2015.  Briefing on the motion is scheduled to be completed on May 8, 2015.

Separate class actions brought on behalf of “non-premium” subscribers who paid securities exchanges for access to market data are pending in the SDNY.  See e.g. Harold R. Lanier v. BATS Exchange, Inc., et. al., 14-cv-3745.  Plaintiffs allege that national securities exchanges, including BATS, breached their contractual and other common law duties to non-premium subscribers by providing market data more slowly to them than they provided it to their preferred data customers.  Oral argument on defendants’ motions to dismiss was held on January 16, 2015.  The court’s decision on the motions is pending.