Ruling on Barclays’ motion to dismiss the action brought by the New York Attorney General regarding Barclays’ alternative trading system (“ATS”), Justice Shirley Kornreich suggested that the AG may face substantial hurdles in proving its case, although the Court narrowly upheld the Martin Act claim as a matter of law.

The AG based its claim on statements allegedly made to ATS participants regarding restrictions on use of the ATS for certain types of high frequency trading activity, which the complaint alleged to be false.  The case raised the novel legal issue of whether New York’s Martin Act applies to these statements, which did not relate to the purchase or sale of any particular security but addressed the nature of the trading venue that might be selected for securities transactions.

Finding that legal issue to be a “close call,” the Court determined that doubts about the Martin Act’s applicability should be resolved in the AG’s favor, and upheld the Martin Act claim even though the marketing statements at issue did not involve the characteristics of any security.  The Court, however, dismissed a claim based on the New York Executive Law, ruling that the statute does not create an independent claim for relief.

The Court ruled only on the legal issues regarding the scope of the Martin Act and the Executive Law, and did not address the sufficiency of the AG’s allegations.  The Court noted that the AG had sought leave to file an amended complaint and that the sufficiency of the allegations would be considered in a subsequent motion addressed to the amended pleading.

The Court’s decision also indicated that the AG may have a tough road ahead in several respects.

First, the Court noted that ATS customers are some of the largest and most sophisticated securities traders and “financial experts.”  As such, it may be difficult for the AG to prove materiality:

[I]t should go without saying that a Martin Act claim cannot be based on representations on which no reasonable sophisticated investor (the only investors who trade in dark pools) would rely. . . . The focus is on what a reasonable, sophisticated trader, trading millions of dollars, actually would consider material.

Second, for marketing materials about the ATS to be to actionable, the Court said that the materials must contain a degree of specificity, as opposed to impermissibly vague descriptions and “sheer puffery.”  In particular, the Court stated that no liability could be based on references in marketing materials to “toxic,” “predatory” or “aggressive” trading, terms which the Court characterized as “meaningless.”

Third, the Court also appeared to reject claims based on drafts of marketing materials, as opposed to marketing materials that actually had been sent to users of the ATS.  The Court likewise ruled that sophisticated investors would know that materials labeled “sample” were subject to change and, as such, the materials could not be materially misleading.

Finally, the Court stated that the AG’s “rhetoric” about the alleged harms of high frequency trading “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 stated that high frequency trading is a “fact of life on Wall Street” and that it is up to federal securities regulators and Wall Street experts – and not the Court – to determine sound market structure policy.