United States District Court, S.D. New York
BARBARA STROUGO, Individually and on Behalf of All Others Similarly Situated, Plaintiffs,
BARCLAYS PLC, BARCLAYS CAPITAL INC., ROBERT DIAMOND, ANTONY JENKINS, CHRISTOPHER LUCAS, TUSHAR MORZARIA, and WILLIAM WHITE, Defendants.
Jeremy A. Lieberman, Esq., Emma Gilmore, Esq., Pomerantz LLP, New York, New York, for Plaintiffs.
Patrick V. Dahlstrom, Esq., Pomerantz LLP, Chicago, Illinois Jeffrey T. Scott, Esq., David H. Braff, Esq., Matthew A. Schwartz, Esq., Andrew H. Reynard, Esq., John J. Hughes, III, Esq., Sullivan & Cromwell LLP, New York, New York, for Defendants.
OPINION AND ORDER
SHIRA A. SCHEINDLIN, District Judge.
Plaintiffs bring this putative class action on behalf of themselves and all others similarly situated against Barclays PLC and Barclays Capital Inc. (collectively, "Barclays"), and Robert Diamond, Antony Jenkins, Christopher Lucas, Tushar Morzaria, and William White (the "Individual Defendants" and, together with Barclays, "defendants"). The putative class consists of all persons and entities who purchased Barclays PLC's American Depositary Shares ("ADSs") between August 2, 2011 and June 25, 2014 and were allegedly damaged thereby.
On June 25, 2014, the New York State Office of the Attorney General ("NYAG") brought a lawsuit against Barclays under New York's Martin Act, alleging that Barclays concealed information about the operation of its "dark pool" - marketed as Barclays' Liquidity Cross or LX - a private trading venue where investors can trade stocks with near anonymity. Borrowing heavily from the complaint in the NYAG action, plaintiffs allege that the success of LX was accomplished through false representations about its transparency and safeguards. Contrary to these representations, Barclays not only allowed aggressive high frequency traders ("HFTs") in its dark pool, but it sought them out and gave them the information they needed to take advantage of other traders.
Plaintiffs allege that Barclays intentionally falsified marketing materials and made other false statements about the safeguards of LX to increase its market share. But the fraud at LX is only the latest in a series of scandals that have marred Barclays' reputation. Plaintiffs emphasize that as a result of these prior scandals, Barclays vowed change. Thus, plaintiffs seek to hold defendants liable for the statements Barclays made about changing its governance related to conduct and reputation, as well as the statements made about LX.
Plaintiffs assert violations of section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 10b-5 promulgated thereunder against all defendants, and violations of section 20(a) of the Exchange Act against the Individual Defendants. Defendants move under Federal Rule of Civil Procedure 12(b)(6) to dismiss the Amended Complaint ("Complaint") on the grounds that: (1) plaintiffs cannot rely on allegations copied from the NYAG complaint without investigation; (2) plaintiffs fail to plead any material misrepresentations; (3) plaintiffs fail to plead facts giving rise to a strong inference of scienter; (4) plaintiffs are not entitled to recover losses based on an article published several days after the filing of the NYAG action because they have not pleaded loss causation as to that article; and (5) plaintiffs' section 20(a) claims for control person liability must be dismissed because plaintiffs have failed to adequately allege a primary violation of section 10(b) or control on the part of the Individual Defendants. For the following reasons, defendants' motion is GRANTED solely to the extent that the section 20(a) claims are dismissed as to Individual Defendants Lucas and Morzaria, and is otherwise DENIED (except insofar as the alleged misstatements regarding Barclays' general business practices and risk controls and in response to the Salz report are deemed inactionable, and plaintiffs may not seek damages arising from the June 27 Telegraph article).
Barclays PLC is a financial services company based in England. Its indirect subsidiary, Barclays Capital Inc., has its primary offices in New York City, and operates Barclays LX. Robert Diamond was Barclays PLC's Chief Executive Officer from January 2011 until July 3, 2012; in August 2012, he was replaced by Antony Jenkins. Christopher Lucas was Barclays PLC's Finance Director from April 2007 until August 2013; in October 2013, Tushar Morzaria assumed that role. William White is the Head of Equities Electronic Trading at Barclays Capital Inc.
A. Dark Pools and HFTs
A "dark pool" is "an [Alternative Trading System ("ATS")] that does not display quotations or subscribers' orders to any person or entity, either internally within an ATS dark pool or externally beyond an ATS dark pool (other than to employees of the ATS)." "Dark pools were first established to avoid large block orders from influencing financial markets and to ensure trading privacy. Trading in dark pools is conducted away from public exchanges purportedly so the trades remain anonymous." As a result, investors can trade on an ATS with a lower risk of moving the market price. "About 15% of U.S. equity-trading volume is transacted in dark pools, more than triple levels of five years ago."
HFTs use high-speed computers to make large numbers of trades within fractions of a second in order to profit from small changes in the prices of securities. Some HFTs "gauge supply and demand and recognize movements in market sentiment before other traders." HFTs can use this information to "trade ahead" of the investor who placed the order. That is, HFTs can buy shares ahead of an investor seeking to purchase shares at market price and then sell those shares to that investor at a somewhat higher price. The identification of the order, the purchase, and the sale all take place within fractions of a second. "As of 2009, studies suggested HFT trading accounted for 60%-73% of all U.S. equity trading volume."
B. The Libor Scandal and the Salz Report
In 2012 Barclays agreed to pay roughly five hundred million dollars to regulators to settle allegations that it manipulated Libor rates from 2005 through 2009. One form of manipulation was that traders were able to influence their colleagues on the Libor desk by making requests by email to misstate Libor - either upwards or downwards - so that the traders could earn profits for their clients. Regulators believed that Barclays lacked specific internal controls and procedures that would have enabled management to discover the false reporting of Libor rates.
In July 2012, Barclays commissioned Sir Anthony Salz, a prominent lawyer and former chairman of the BBC, to review its practices "with a view to providing a comprehensive roadmap for cultural change at the bank." Salz issued his report on April 3, 2013. The report made a number of findings, including that: "Barclays' bankers were engulfed in a culture of edginess' and had a winning at all costs' attitude"; pay "contributed significantly to a sense among a few that they were somehow unaffected by the rules"; "[s]ignificant failings developed in the organization as it grew"; "[t]he business practices for which Barclays has rightly been criticized were shaped predominantly by its culture, which rested on uncertain foundations"; and "[t]here was no sense of common purpose in a group that had grown and diversified significantly in less than two decades." Over all, there was a "strong drive to win, " which led to an "over-emphasis" on short-term financial performance, reinforced by a bonus and pay culture that rewarded money-making over serving the public interest. There was also a sense that senior management did not want to hear bad news. And "Barclays was sometimes perceived as being within the letter of the law but not within its spirit, " on account of "an institutional cleverness."
Salz made thirty-four recommendations intended to "provide a valuable road map for [Barclays'] future." For example, Salz recommended that "Barclays  ensure its conduct, reputational and operational risk framework includes the articulation of a tangible risk appetite statement and mechanisms to ensure that conduct, reputational and operational risk are fully factored into business decisions and governance." Salz's recommendations were meant to be "global and span all businesses within Barclays without exception."
Barclays' new chairman, Sir David Walker, described the Salz report as "an insightful, rigorous, and, crucially, independent view of how Barclays could improve, " which was "informed by unprecedented access to the bank and its people." Barclays committed to implement in full each recommendation in the Salz report as part of Barclays' determination to regain the trust of all of Barclays' shareholders.
Indeed, Barclays claimed to have made changes starting in 2012 through the "Transform Programme, " which was designed to "deliver the fundamental cultural, financial and performance changes necessary" to gain the public trust. Barclays represented that "[i]n the spirit of transparency and rebuilding trust, Barclays will publish updates on [its] progress in [its] implementation programme." Barclays "aim[ed] to have the majority of all the [Salz] recommendations fully implemented by 2015." Even so, as reported on May 23, 2014 by Reuters, Barclays was fined $43.8 million "for failures in internal controls that allowed a trader to manipulate the setting of gold prices, just a day after the bank was fined for rigging Libor interest rates in 2012."
C. Barclays LX
In 2009, Barclays LX was the tenth largest dark pool in the United States. Becoming the largest dark pool became the principal goal of Barclays' Equities Electronic Trading division. Barclays LX was referred to internally as "The Franchise" and growing the pool was "not only central to driving profits for the division, but also an imprimatur of prestige." Barclays identified the "market share value of attracting more [order] flow" into its dark pool at between thirtyseven and fifty million dollars per year.
In order to grow the dark pool, Barclays had to increase the number of orders that it, acting as broker, executed in LX. This required that Barclays route more client orders into the dark pool, and ensure that there was sufficient liquidity to fill those orders. To meet this need, Barclays charged White with attracting HFTs into the dark pool. As a result of "false and misleading statements and marketing materials, " LX became one of the top two largest dark pools in the United States by January 2013.
At the same time, White attributed "LX's success to Barclays' commitment to being transparent regarding Barclays' operations, how Barclays routes client orders, and the kinds of counterparties traders can expect to deal with when trading in the dark pool." According to White, transparency was "the one issue that we really took a stance on" and "[t]ransparency on multiple levels is a selling point for our entire equities franchise." To convince the market of the safety of trading in its dark pool, Barclays promoted a service called "Liquidity Profiling." Barclays represented that Liquidity Profiling allowed it to monitor the "toxicity" of the trading behavior in its dark pool and to "hold traders accountable if their trading was aggressive, predatory, or toxic." Barclays also said its team "quickly responds with corrective action when adverse behavior is detected." And Barclays claimed it would refuse clients access to the dark pool if they engaged in aggressive or "toxic" trading strategies.
However, LX was a magnet for HFTs. According to the Complaint, Barclays never refused a client access, and applied "overrides" to a number of traders in the dark pool, assigning safe Liquidity Profiling ratings to traders that should have been rated as toxic. The Complaint alleges that Barclays knew that its Liquidity Profiling tool was ineffective. One former director explained that Barclays "purports to have a toxicity framework that will protect you when everybody knows internally that that thing is done manually with outliers removed and things are classified only if they feel like it." Another former director described Liquidity Profiling as "a scam."
The NYAG commenced its lawsuit on June 25, 2014. On news of the lawsuit, Barclays' ADSs fell 7.38 percent on heavy volume. On June 27, 2014, the Telegraph, a newspaper in London, reported that a financial analyst "estimated" that Barclays might pay three hundred million pounds to settle the NYAG case. On June 30, the next trading day, Barclays' stock dropped an additional one-and-ahalf percent on heavily traded volume of over eleven million shares.
III. STANDARD OF REVIEW
A. Rule 12(b)(6) Motion ...