A.G. Schneiderman Announces Landmark Resolutions With Barclays And Credit Suisse For Fraudulent Operation Of Dark Pools; Combined Penalties And Disgorgement To State Of New York And Sec Of Over $154 Million

A.G. Schneiderman Announces Landmark Resolutions With Barclays And Credit Suisse For Fraudulent Operation Of Dark Pools; Combined Penalties And Disgorgement To State Of New York And Sec Of Over $154 Million

NEW YORK – Attorney General Eric T. Schneiderman today announced that Barclays Capital Inc. and Credit Suisse Securities (USA) LLC will pay a combined $154.3 million to the State of New York and the SEC to settle investigations into false statements and omissions made in connection with the marketing of their respective dark pools and other high-speed electronic equities trading services. Dark pools are private exchanges for trading securities that are not viewable by the general public and are completed outside of public stock exchanges.  

Barclays admitted to core facts set forth in the Attorney General’s Complaint from June 2014 alleging misrepresentations about how it operated its dark pool, "Barclays LX," including that it misled investors and violated securities laws. Barclays will pay a penalty of $70 million, split equally between the State of New York and the SEC, and will install an independent monitor to ensure proper operation of its electronic trading division. 

Credit Suisse will pay a penalty of $60 million split equally between the State of New York and the SEC, and will pay a further $24.3 million in disgorgement and prejudgment interest to the SEC relating to other violations.  The Attorney General and the SEC have both censured Barclays and Credit Suisse for their misconduct.

"These cases mark the first major victory in the fight to combat fraud in dark pool trading and bring meaningful reforms to protect investors from predatory, high-frequency traders," Attorney General Schneiderman said. "This effort, which began when we first sued Barclays, includes coordinated and aggressive government action which forced admissions of wrongdoing and record fines.  We will continue to take the fight to those who aim to rig the system and those who look the other way."

In March of 2014, Attorney General Schneiderman called for tougher regulatory oversight and market reforms to eliminate unfair advantages provided to high-frequency traders at trading venues.  In a speech delivered at New York Law School on March 18, 2014, the Attorney General committed to cracking down on “fundamentally unfair and potentially illegal” arrangements that give certain traders early access to market-moving information at the expense of the rest of the market. As part of those efforts, Attorney General Schneiderman launched investigations into Credit Suisse and Barclays, the largest and second largest dark pool operators at the time, in order to expose illegal practices and ensure a level playing field for all investors.  

Since that time, the Attorney General has reached agreements with Thomson Reuters, Business Wire, and others to end business practices that provided high frequency traders an unfair advantage. 

A copy of the agreements can be found here and here


As set forth fully in the Amended Complaint filed in New York Supreme Court in February 2015, the Attorney General uncovered evidence that Barclays made knowing and systematic misrepresentations to investors about how, and for whose benefit, Barclays operated its dark pool called “Barclays LX,” and exposed its clients to the predatory traders from whom it promised to protect them.  As a result of that fraud, Barclays grew its dark pool to be the second largest in the United States.

In January 2015, the court upheld the Attorney General’s jurisdiction over Barclays’ fraudulent conduct when it denied Barclays’ motion to dismiss the Attorney General’s Complaint.  In today’s resolution, Barclays admits that it violated the securities laws by making material misrepresentations to investors regarding a wide range of issues, including:

  • Barclays misrepresented how it monitored its dark pool for high-speed predatory trading.  Despite repeatedly telling clients that it used sophisticated tools to monitor for “latency arbitrage,” and ran weekly surveillance reports, Barclays in fact did neither.
  • Barclays’ “Liquidity Profiling” service, which was supposed to allow traditional investors to opt-out of trading with the most aggressive high-speed traders in Barclays’ dark pool, was in fact riddled with exceptions for favored high-speed clients, meaning that traditional traders who thought they were trading only against the safest counterparties were in fact trading with some of the most aggressive and predatory high-speed traders in Barclays’ pool.
  • Barclays overrode the “Liquidity Profiling” rating of its internal high-frequency trading desk, making it appear to be a “safe” trading partner, when in fact Barclays knew it to be among the most predatory in its pool.
  • For several years, Barclays disseminated to investors an analysis of the trading in its dark pool, from which Barclays intentionally deleted the largest, most aggressive trader, in order to make its pool appear safer than it really was.
  • Barclays repeatedly told investors that it used the fastest market data feeds from all major exchanges to price trades in its pool; in fact, Barclays did not do so.

Barclays also acknowledges, consistent with the court’s ruling, the Attorney General’s jurisdiction under New York’s Martin Act.   Barclays will also install an independent monitor to conduct an in-depth review of Barclays’ electronic trading business, and to propose further reforms to ensure that the company complies with New York law. 

Those undertakings are in addition to actions taken by Barclays in the immediate wake of the filing of the lawsuit, which included the suspension from duties of William White, then-head of the Electronic Trading Division, and the removal of David Johnsen, White’s second-in-command, from his formal supervisory roles over the electronic trading division. 

The Attorney General also thanked the Barclays insiders that provided valuable assistance with the investigation.  “It is critically important that those with knowledge of fraudulent conduct continue to contact my Office, to share what they know in confidence.  As today’s resolution with Barclays illustrates, my Office takes seriously all allegations of wrongdoing and takes appropriate action.  I personally thank the individuals who spoke out against the misconduct at Barclays for their valuable service to the people of the State of New York.”

Credit Suisse

The Attorney General’s investigation found that Credit Suisse made misrepresentations concerning two equities trading venues, Crossfinder and Light Pool, operated by Credit Suisse’s Advanced Execution Services (“AES”) division, as well as the manner in which AES routed client orders and handled confidential client order information.

As set forth fully in the Agreement, Credit Suisse promoted an “alpha scoring” feature which, according to Credit Suisse’s marketing, gave clients the ability to avoid trading with counterparties, such as certain high-frequency trading (“HFT”) firms, whose order flow Credit Suisse considered “opportunistic” and detrimental to institutional investors.  In fact, Credit Suisse misrepresented key aspects of that feature, including:

  • Credit Suisse repeatedly told clients that alpha scoring in its Crossfinder dark pool was objective and transparent.  In reality, Credit Suisse considered multiple subjective factors when categorizing participants, resulting in certain HFT firms being rated as non-opportunistic, even though those firms were objectively “opportunistic.”
  • Credit Suisse told clients that it categorized Crossfinder participants monthly based on the results of alpha scoring.  In fact, Credit Suisse only performed categorizations on an ad hoc basis, and client interactions were therefore based on stale data.
  • Credit Suisse favored select Light Pool participants, including some HFT firms, by giving them warning calls when they were at risk of being categorized as opportunistic and by temporarily suspending rather than kicking out such participants (as Credit Suisse promised) if they were categorized as opportunistic.
  • Credit Suisse did not apply alpha scoring in Light Pool until one year after that venue became operational, despite representations to the contrary.                    

Credit Suisse also made material misrepresentations and omissions regarding how AES handled confidential client orders, including:

  • Credit Suisse told clients that it did not preference any trading venue over another when routing orders, except based on execution quality.  In fact, Credit Suisse systematically prioritized its own dark pool, Crossfinder, over others, regardless of execution quality.
  • Credit Suisse told clients that it performed regular analyses of the venues to which it routed orders, but in fact performed venue analyses only irregularly.
  • Credit Suisse created and operated an undisclosed matching platform called Crosslink that secretly enabled two HFT firms to trade directly with orders submitted by other Credit Suisse clients.
  • Credit Suisse did not fully disclose its transmission of confidential client order information outside of Crossfinder.

This misconduct occurred in an environment in which Credit Suisse’s AES business lacked adequate policies and procedures relating to alpha scoring, order routing, the use of confidential client order information, and client disclosures.

The resolutions announced today are the result of joint efforts by the New York Attorney General’s Office and the SEC.  Attorney General Schneiderman appreciates the successful collaboration with the SEC on these matters.

The Attorney General’s investigations were led by Chad Johnson, Chief of the Investor Protection Bureau, Assistant Attorneys General John Castiglione, Rebecca Reilly, Jordan Salberg, and Jonathan Zweig, and Senior Adviser and Special Counsel Nicholas Suplina.  Karla G. Sanchez is the Executive Deputy Attorney General for Economic Justice.