Antitrust Law Daily Wrap Up, STATE UNFAIR TRADE PRACTICES—S.D.N.Y.: Claims that operation of stock trading venue favored high-frequency traders fails, (Aug 28, 2015)

By Edward L. Puzzo, J.D.

Unfair competition and false advertising claims, alleging that a “dark pool” stock trading venue was operated in a manner that allowed high-frequency trading firms to exploit other investors, failed due to an inability to demonstrate actual reliance on deceptive statements, the federal district court in New York City has ruled (In Re: Barclays Liquidity Cross And High Frequency Trading Litigation, August 26, 2015, Furman, J.).

This multidistrict litigation, consolidated in this court by the Judicial Panel on Multidistrict Litigation (JPML), arose from various allegations that stock exchanges and other stock-trading venues enabled high-frequency traders to gain unfair advantages to obtain and trade on market data faster than other investors.

One of the actions, originally filed in the United States District Court for the Central District of California, was brought by Great Pacific Securities against Barclays PLC and Barclays Capital, operators of a “dark pool,” an alternate trading venue not required by the SEC to publish transaction information—the best bid and offer available—until after the transaction closed.

One of the allegations against Barclays was that it endeavored to capture trading volume from high-frequency trading (HFT) firms by providing them with advantageous proprietary feeds and co-location services at prices only affordable by HFT firms. Barclays, recognizing that ordinary investors might refuse to trade in a dark pool rigged in favor of “predatory” HFT firms, marketed its dark pool to ordinary investors as a “safe” place for them to trade. They also introduced a service called Liquidity Profiling, which in theory allowed investors to avoid interacting with the most aggressive HFT firms in the dark pool. Nevertheless, it was alleged, Barclays misrepresented its dark pool as a safe place to trade, even as it operated the dark pool in a manner that permitted HFT firms to exploit the plaintiffs.

Great Pacific alleged that Barclays, among other claims, violated California’s False Advertising Law (FAL) and Unfair Competition Law (UCL) by failing to disclose: (1) the amount of aggressive trading in its dark pool; (2) that it was actively recruiting HFT firms to trade in its dark pool; and (3) the significant limitations of Liquidity Profiling. Barclays moved to dismiss.

Standing. To possess standing to bring claims under the FAL and UCL, the court explained, plaintiff’s economic injury must come as a result of—i.e., with a showing of a causal connection or reliance on the alleged misrepresentation—the unfair competition or a violation of the false advertising law. Further, when the claims sound in fraud, plaintiff must demonstrate actual reliance on the allegedly deceptive or misleading statements, and the pleadings must meet Rule 9(b)’s heightened pleading requirements for fraud-based claims.

False statements. Based on those standards, the court ruled, Great Pacific’s claims failed as a matter of law. First, Great Pacific’s claims premised on Barclays’s alleged failure to adequately disclose the level of aggressive trading in its dark pool were deficient because the complaint did not identify any materially false or misleading statement by Barclays.

Reliance. Second, its claims premised on Barclays’s courtship of HFT firms and its Liquidity Profiling service failed to allege reasonable actual reliance on any statements or omissions by Barclays. Great Pacific urged the court to adopt a presumption of reliance, citing California precedent in In re Tobacco II Cases, 207 P.3d 20 (2009), which made a showing of actual reliance on particular statements unnecessary where tobacco companies had engaged in a decades-long ubiquitous saturation advertising campaign to conceal the health risks of their product. However, the court stated, California courts have declined to apply that ruling in the absence of such a substantial advertising campaign. Here, Great Pacific was only able to identify one purported advertisement—a presentation containing a discussion of Liquidity Profiling — to which it was exposed. This did not come close, the court continued, to pleading the type of sustained, saturation advertising campaign that allowed a presumption of reliance in the tobacco cases. To the contrary, applying the Tobacco II Cases presumption here would all but eliminate the actual reliance requirement for UCL and FAL claims, and allow a plaintiff to simply assert in conclusory fashion that it was exposed to advertising. For these reasons, Great Pacific’s UCL and FAL claims must be dismissed, the court ruled.

Leave to amend. The deficiencies in Great Pacific’s complaint turned on its failure to plead sufficient facts to establish a plausible claim, rather than an inherently flawed legal theory, so amendment would not necessarily be futile. Therefore, the court did grant Great Pacific leave to amend its complaint.

The case is Civil Action No. 14-MD-2589 (JMF).

Attorneys: Andrew J. Brown (Robbins Geller Rudman & Dowd LLP) for City of Providence, Rhode Island, Employees' Retirement System of the Government of the Virgin Islands, Forsta AP-fonden, Plumbers and Pipefitters National Pension Fund, and State-Boston Retirement System. Albert Y. Chang (Bottini and Bottini Inc.) for Great Pacific Securities. Adam S. Paris (Sullivan and Cromwell LLP) for Barclays Capital, Inc., and Barclays PLC. James Alwin Murphy (Murphy & McGonigle, PC) for Bats Global Markets, Inc., and Direct Edge ECN, LLC. Christos Papapetrou (Levine Lee LLP) for Chicago Stock Exchange, Inc. George Anthony Borden (Williams & Connolly LLP) for NYSE Arca, Inc.

Companies: Employees' Retirement System of the Government of the Virgin Islands; Forsta AP-fonden; Plumbers and Pipefitters National Pension Fund; State-Boston Retirement System; Great Pacific Securities; Barclays Capital, Inc.; Barclays PLC; Bats Global Markets, Inc.; Direct Edge ECN, LLC; Chicago Stock Exchange, Inc.; NYSE Arca, Inc.

Cases: StateUnfairTradePractices Advertising NewYorkNews