Barclays shares fall 6.5% on fraud accusation

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Shares in Barclays have fallen 6.52% after the New York attorney general filed a fraud lawsuit against the bank.

The lawsuit alleges the bank falsified documents and misrepresented benefits it was offering to big institutional clients, including pension funds.

It relates to the bank's "dark pool" trading operations, which allow clients to trade large blocks of shares while keeping prices private.

Barclays has begun an internal probe into the allegations.

In an email to staff, Barclays chief executive Antony Jenkins said: "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."

Shares in the bank opened down about 4% in London and, at one point during mid-afternoon trading, were almost 9% lower, before closing down 6.5%. Other European banks lost ground on fears they could also be targeted.

Barclays

Last Updated at 27 Nov 2014, 05:25 ET *Chart shows local time Barclays intraday chart
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Prosecutors said Barclays misrepresented the kinds of investors that were using the dark pool. They said the bank claimed the pool was closed to aggressive traders, but in reality it was not.

They also said the bank had misled ordinary investors by claiming it would use a stock exchange or dark pool that "would best execute their trades" at any given time, but in fact the trades were "nearly always" routed to Barclays' own dark pool so the bank could make more money.

The world's major stock markets, such as the London and New York Stock Exchanges, are known as light markets, as they are highly transparent and regulated.

Dark pools are private markets set up by banks that are less transparent and so are not open to the same levels of scrutiny.

'Full of predators'

New York attorney general Eric 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," he said.

The complaint details "a flagrant pattern of fraud, deception and dishonesty with Barclays clients and the investing public," he added.

Mr Schneiderman said presentations made by Barclays were "demonstrably false". He read out some of the emails cited in the complaint. One, from a vice-president of sales, said: "I always like the idea we are being transparent, but happy to take liberties if we can all agree."

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Analysis

Samira Hussain, BBC business reporter, New York

Dark pools are under the spotlight.

There are at least 40 operating in the US where they compete against traditional exchanges.

But these private platforms operate outside the public eye.

And that's becoming a big issue, especially in this post-recession era, when banks have been blamed for a crippling financial crisis.

Regulators are taking a much closer look at everything banks do, especially things that can so easily fall under the radar.

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The lawsuit said that Barclay's marketing material was misleading over the extent of high-frequency trading in its dark pool.

High-frequency traders use fast, sophisticated trading software to buy and sell shares faster than ordinary investors, and can make large profits by taking advantage of very small moves in share prices.

The lawsuit accused Barclays of telling investors trading was being closely monitored and "predatory" traders would be held accountable.

'Inside help'

But in fact Barclays did not prohibit a single trader from operating in its dark pool, the lawsuit said.

What are dark pools?

  • Private trading areas that are not open to the public
  • Generally used by large institutional investors to buy and sell big blocks of shares
  • No trading information is made available until after the trades have been completed
  • This means institutions can trade without showing their hands to rivals and other investors
  • There are no exchange fees so trading in dark pools is cheaper than trading on established exchanges

In addition, the lawsuit alleges that Barclays operated its dark pool to favour high-frequency traders and "actively sought to attract them".

"Some might argue that if you trade in dark pools and come across some sharks, you shouldn't be too surprised," said the BBC's business editor Kamal Ahmed.

He said Barclays could be facing "endless fines" if the allegations are proved.

In a statement the bank said: "Barclays has been cooperating with the New York attorney general and the SEC and has been examining this matter internally. The integrity of the markets is a top priority of Barclays."

The attorney general said that the investigation had been significantly helped by a number of former Barclays' employees.

Other investigations

Barclays has been the subject of several investigations, fines and settlements in recent years.

In May it was fined £26m by UK regulators after one of its traders was discovered attempting to fix the price of gold.

In April, Barclays agreed to a $280m (£167m) settlement with the US Federal Housing and Finance Authority (FHFA).

The agreement settles claims by the FHFA that Barclays misled US mortgage lenders Fannie Mae and Freddie Mac during the housing crisis.

In 2012 it was fined £290m by UK regulators for attempting to manipulate an important lending rate, known as Libor.

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