Barclays in dark pool crisis as fraud accusations emerge

Allegations of misleading investors to boost the bank’s balance sheet have once again left Barclays Bank in a tailspin, as shares slumped and pressure intensified on chief executive Antony Jenkins.

Last Wednesday, New York attorney general Eric Schneiderman filed a lawsuit claiming that Barclays bank falsified documents and misrepresented benefits of the dark pool operations it was offering to big institutional clients.

Known as the Barclays LX dark pool, the equities department deals with 282m shares each week and is the second-largest US dark pool behind Credit Suisse’s Crossfinder, according to the Financial Industry Regulatory Authority.

Dark pool is the term used to describe the set of operations that allow clients to trade large blocks of shares while keeping prices private. This is in sharp contrast to light markets such as the London Stock Exchange, which is both highly transparent and regulated.

The allegations say Barclays had told investors that the pool would not be open to high-frequency traders who use software to buy and sell stocks quicker than ordinary investors resulting in the accumulation of large profits on trades. However, in actuality, Barclays did not stop any predatory trader from using its dark pool, the lawsuit explained.

Furthermore, the bank is accused of falsely telling ordinary investors that it would use a stock exchange or dark pool that “would best execute their trades” at any given time, when in fact all trades were predominantly pushed through Barclays’ own dark pool so the bank could make more money.

Schneiderman said: “The facts alleged in our complaint show that Barclays demonstrated a disturbing disregard for its investors in a systematic pattern of fraud and deceit.”

“Barclays grew its dark pool by telling investors they were diving into safe waters. According to the lawsuit, Barclays’ dark pool was full of predators – there at Barclays’ invitation.”

Tough penalties

Dark pools tend to compete against traditional exchanges and large-scale investors are attracted to the ability to make trades without having to show competitors their hand. However, regulators are becoming increasing cautious of the activity, especially given the fault attached to the banking sector for the global crash. Credit Suisse analysts estimated potential penalties for falling foul of regulations could top £95m.

Announcing an internal investigation into the allegations and ongoing cooperation with the New York attorney general and the U.S. Securities and Exchange Commission, Jenkins sought to reassure clients and investors: “I will not tolerate any circumstances in which our clients are lied to or misled and any instances I discover will be dealt with severely. The success of our business depends crucially on our clients being able to rely absolutely on our honesty and integrity.”

The impact on Barclays‘

Following the news breaking, Barclays’ shares tumbled by as much as 9% before recovering at the close, but the development has had the biggest impact on the qualities of CEO Jenkins.

University of Oxford alumnus Jenkins promised a change of culture at the bank, following his appointment to the C-Suite in August 2012 in the aftermath of the Libor scandal, based on the values of integrity, service, stewardship, excellence and respect.

“There will be no going back to the old ways of doing things,” he said. “We get it. We are changing the way we do business, we are changing the type of business we do and we are setting out a new course.”

If Barclays’ are found guilty of lying to customers over dark pool trades, it will undoubtedly undermine his plan, the bank’s reputation and raise eyebrows as to whether Jenkins is the right leader to take the bank into a new, brighter and more ethical future.

The investigation alone is likely to halt Barclays’ plans to expand its equities division, as income from fixed-income trading declines. During the first quarter, income at the bank’s equities division fell by 5% compared to the 41% fall in revenues felt by the larger fixed-income, commodities and currencies arm.

“He’s lost some credibility,” said Colin McLean, founder and CEO of SVM Asset Management, which holds Barclays shares, in Edinburgh. “He hasn’t achieved the cultural change he’s talked about. A lot of activities will come under scrutiny.”

Barclays has a controversial recent past that it is trying hard to detach itself from. In the last year alone the bank has been fined £26m by UK regulators after one of its traders was discovered attempting to fix the price of gold. A month later in April, Barclays agreed to a £167m settlement with the US Federal Housing and Finance Authority after accusations of misleading US mortgage lenders Fannie Mae and Freddie Mac during the housing crisis.

Are profits and ethics mutually exclusive? Read this article for the views of AAT’s Head of Conduct and Compliance, Tania Hayes on this issue.

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Jermaine Haughton is a journalist and digital media professional.