Strougo v. Barclays PLC et al
OPINION AND ORDER re: 28 MOTION to Dismiss Consolidated Amended Complaint. filed by Tushar Morzaria, Bob Diamond, Antony Jenkins, William White, Chris Lucas, Barclays Capital, Inc., Robert Diamond, Barclays PLC. For the forego ing 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 039; general business practices and risk controls and in response to the Salz report identified herein are deemed inactionable and plaintiffs may not seek damages based on the June 27 Telegraph article). Plaintiffs shall amend the Complaint within th irty days to comply with their obligations under Rule 11 as noted in section IV.A of this Opinion and Order. The Clerk of the Court is directed to close this motion (Docket No. 28). A conference is scheduled for May 5, 2015 at 4:30 p.m. SO ORDERED. (See Order.) (Status Conference set for 5/5/2015 at 04:30 PM before Judge Shira A. Scheindlin.) (Signed by Judge Shira A. Scheindlin on 4/24/2015) (ajs)
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
BARBARA STROUGO, Individually and on
Behalf of All Others Similarly Situated,
I DATE FI--LE_D_:~1~)~l~j+-L0_,
OPINION AND ORDER
BARCLAYS PLC, BARCLAYS CAPITAL INC.,
ROBERT DIAMOND, ANTONY JENKINS,
CHRISTOPHER LUCAS, TUSHAR
MORZARIA, and WILLIAM WHITE,
SHIRA A. SCHEINDLIN, U.S.D.J.:
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,
The facts below are taken from the Consolidated Amended Complaint
for Violations of the Federal Securities Laws (“Compl.”).
and operates Barclays LX.2 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
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).”4 “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.”5 As a result, investors can trade on an ATS with a
See Compl. ¶¶ 15-16.
See id. ¶¶ 17-21.
Id. ¶ 40 (quotation marks omitted).
Id. By contrast, “when an investor places a sell order on a ‘lit’ venue,
such as the New York Stock Exchange, the exchange immediately broadcasts the
price and quantity that the investor is seeking to sell. In response to the supply of
shares for sale, the market price may drop.” Defendants’ Memorandum of Law in
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.”6
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.”7 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.8 “As of 2009,
studies suggested HFT trading accounted for 60%-73% of all U.S. equity trading
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
Support of Their Motion to Dismiss the Amended Complaint (“Def. Mem.”), at 5.
Compl. ¶ 40.
Id. ¶ 42.
Id. ¶ 43.
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
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.”11 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,
See id. ¶¶ 24-26.
Id. ¶ 28.
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.”12
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.”13
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
Id. ¶ 30.
people.”14 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’
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.16 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.”17 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.”18
In 2009, Barclays LX was the tenth largest dark pool in the United
Id. ¶ 31.
See id. ¶ 32.
Id. ¶ 33.
Id. ¶ 37.
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.”19 Barclays identified the “market
share value of attracting more [order] flow” into its dark pool at between thirtyseven and fifty million dollars per year.20
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.21 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 2013.22
At the same time, White attributed “LX’s success to Barclays’
commitment to being transparent regarding Barclays’ operations, how Barclays
Id. ¶ 52.
Id. ¶ 54 (alterations in original).
See id. ¶¶ 56-57.
Id. ¶ 59.
routes client orders, and the kinds of counterparties traders can expect to deal with
when trading in the dark pool.”23 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.”24 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.”25 Barclays also said its team
“quickly responds with corrective action when adverse behavior is detected.”26
And Barclays claimed it would refuse clients access to the dark pool if they
engaged in aggressive or “toxic” trading strategies.27
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
Id. ¶ 61.
Id. ¶¶ 61, 181, 183.
Id. ¶ 65 (quotation marks and alterations omitted).
Id. ¶ 67 (“[Barclays claimed that b]y identifying aggressive behavior,
we can take corrective action with clients who exhibit opportunistic behavior in the
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.”28 Another former director
described Liquidity Profiling as “a scam.”29
The NYAG commenced its lawsuit on June 25, 2014. On news of the
lawsuit, Barclays’ ADSs fell 7.38 percent on heavy volume.30 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.31
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.32
Id. ¶ 98 (alterations omitted).
See id. ¶ 6.
See id. ¶¶ 119, 197.
See id. ¶ 197. In addition, the scandals at Barclays continued. On
July 29, 2014, the Wall Street Journal reported that banking regulators threatened
to install government monitors inside Barclays’ United States offices after
concluding that the bank may have manipulated the foreign-exchange market. In
an article published on November 7, 2014, the Wall Street Journal reported that as
STANDARD OF REVIEW
Rule 12(b)(6) Motion to Dismiss
In deciding a motion to dismiss pursuant to Rule 12(b)(6), the court
must “accept all factual allegations in the complaint as true and draw all
reasonable inferences in the plaintiff’s favor.”33 The court may consider “the
complaint,  any documents attached thereto or incorporated by reference and
documents upon which the complaint relies heavily,”34 as well as “legally required
public disclosure documents filed with the SEC . . . .”35
The court evaluates the sufficiency of the complaint under the “twopronged approach” suggested by the Supreme Court in Ashcroft v. Iqbal.36 Under
the first prong, a court may “begin by identifying pleadings that, because they are
part of a proposed settlement related to the foreign-exchange manipulation,
regulators “are likely to criticize [Barclays] for allegedly failing to appropriately
supervise their foreign-exchange employees and lacking sufficient internal
controls.” Id. ¶ 38.
Grant v. County of Erie, 542 Fed. App’x 21, 23 (2d Cir. 2013).
Building Indus. Elec. Contractors Ass’n v. City of New York, 678 F.3d
184, 187 (2d Cir. 2012) (quotation marks omitted).
ATSI Commc’ns, Inc. v. Shaar Fund, Ltd., 493 F.3d 87, 98 (2d Cir.
See 556 U.S. 662, 678–79 (2009).
no more than conclusions, are not entitled to the assumption of truth.”37 For
example, “[t]hreadbare recitals of the elements of a cause of action, supported by
mere conclusory statements, do not suffice.”38 Under the second prong of Iqbal,
“[w]hen there are well-pleaded factual allegations, a court should assume their
veracity and then determine whether they plausibly give rise to an entitlement for
relief.”39 A claim is plausible “when the plaintiff pleads factual content that allows
the court to draw the reasonable inference that the defendant is liable for the
misconduct alleged.”40 “The plausibility standard is not akin to a probability
requirement” because it requires “more than a sheer possibility that a defendant has
Heightened Pleading Standard Under Rule 9(b) and the Private
Securities Litigation Reform Act (“PSLRA”)
Private securities fraud claims are subject to a heightened pleading
standard. First, Rule 9(b) requires plaintiffs to allege the circumstances
constituting fraud with particularity. However, “[m]alice, intent, knowledge, and
Id. at 679.
Id. at 678.
Id. at 679.
Id. at 678.
Id. (quotation marks omitted).
other conditions of a person’s mind may be alleged generally.”42
Second, the PSLRA provides that, in actions alleging securities fraud,
“the complaint shall, with respect to each act or omission alleged to violate this
chapter, state with particularity facts giving rise to a strong inference that the
defendant acted with the required state of mind.”43
Leave to Amend
Whether to permit a plaintiff to amend its complaint is a matter
committed to a court’s “sound discretion.”44 Federal Rule of Civil Procedure 15(a)
provides that leave to amend a complaint “shall be freely given when justice so
requires.”45 “When a motion to dismiss is granted, the usual practice is to grant
leave to amend the complaint.”46 In particular, it is the usual practice to grant at
least one chance to plead fraud with greater specificity when a complaint is
dismissed under Rule 9(b).47 Leave to amend should be denied, however, where
Fed. R. Civ. P. 9(b).
15 U.S.C. § 74u-4(b)(2).
McCarthy v. Dun & Bradstreet Corp., 482 F.3d 184, 200 (2d Cir.
Fed. R. Civ. P. 15(a).
Hayden v. County of Nassau, 180 F.3d 42, 53 (2d Cir. 1999).
See ATSI, 493 F.3d at 108.
the proposed amendment would be futile.48
Section 10(b) of the Exchange Act and Rule 10b-5
Section 10(b) of the Exchange Act prohibits using or employing, “in
connection with the purchase or sale of any security . . . any manipulative or
deceptive device or contrivance. . . .”49 Rule 10b-5, promulgated thereunder, makes
it illegal to “make any untrue statement of a material fact or to omit to state a
material fact . . . in connection with the purchase or sale of any security.”50 To
sustain a claim for securities fraud under Section 10(b), “a plaintiff must prove (1) a
material misrepresentation or omission by the defendant; (2) scienter; (3) a
connection between the misrepresentation or omission and the purchase or sale of a
security; (4) reliance upon the misrepresentation or omission; (5) economic loss;
and (6) loss causation.”51
Material Misstatements or Omissions
See Dougherty v. Town of N. Hempstead Bd. of Zoning Appeals, 282
F.3d 83, 87-88 (2d Cir. 2002).
15 U.S.C. § 78j(b).
17 C.F.R. § 240.10b-5.
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S.
148, 157 (2008).
In order to satisfactorily allege misstatements or omissions of material
fact, a complaint must “state with particularity the specific facts in support of
[plaintiffs’] belief that [defendants’] statements were false when made.”52 “[A] fact
is to be considered material if there is a substantial likelihood that a reasonable
person would consider it important in deciding whether to buy or sell [securities] . .
. .”53 Mere “allegations that defendants should have anticipated future events and
made certain disclosures earlier than they actually did do not suffice to make out a
claim of securities fraud.”54
Certain statements are protected by the PSLRA’s safe harbor provision
and the bespeaks caution doctrine. Under the safe harbor provision, a forwardlooking statement is non-actionable when it is “accompanied by meaningful
cautionary language or is immaterial or the plaintiff fails to prove that it was made
with actual knowledge that it was false or misleading.”55 “To avail themselves of
safe harbor protection under the meaningful cautionary language prong, defendants
Rombach v. Chang, 355 F.3d 164, 172 (2d Cir. 2004) (internal
quotation marks omitted).
Operating Local 649 Annuity Trust Fund v. Smith Barney Fund Mgmt.
LLC, 595 F.3d 86, 92-93 (2d Cir. 2010) (internal quotation marks omitted).
Id. Accord Rothman v. Gregor, 220 F.3d 81, 90 (2d Cir. 2000).
Slayton v. American Express Co., 604 F.3d 758, 766 (2d Cir. 2010)
(emphasis in original).
must demonstrate that their cautionary language was not boilerplate and conveyed
substantive information”56 identifying “important factors that could cause actual
results to differ materially from those in the forward-looking statements.”57
Moreover, statements are not protected where defendants “had no basis for their
optimistic statements and already knew (allegedly) that certain risks had become
reality.”58 The applicability of the immateriality prong of the safe harbor
“necessarily depends on all relevant circumstances.”59 Under the judicially created
bespeaks caution doctrine, “alleged misrepresentations . . . are deemed immaterial
as a matter of law [if] it cannot be said that any reasonable investor could consider
them important in light of adequate cautionary language. . . .”60 Statements may
also be deemed immaterial as merely vague expressions of optimism or puffery.61
Id. at 772.
15 U.S.C. § 78u-5(c)(1)(A).
In re Nortel Networks Corp. Sec. Litig., 238 F. Supp. 2d 613, 629
(S.D.N.Y. 2003). Accord Gabriel Capital, L.P. v. NatWest Fin., Inc., 122 F. Supp.
2d 407, 419 (S.D.N.Y. 2000) (observing that the bespeaks caution doctrine “does
not apply where a defendant knew that its statement was false when made”).
ECA, Local 134 IBEW Joint Pension Trust of Chicago v. JP Morgan
Chase Co., 553 F.3d 187, 197 (2d Cir. 2009).
Halperin v. eBanker USA.com, Inc., 295 F.3d 352, 357 (2d Cir. 2002).
See ECA, 553 F.3d at 206; In re Gildan Activewear, Inc., 636 F. Supp.
2d 261, 274 (S.D.N.Y. 2009); In re NTL, Inc. Sec. Litig., 347 F. Supp. 2d 15, 34
Liability under the actual knowledge prong of the safe harbor “attaches only upon
proof of knowing falsity” — a showing of recklessness is insufficient.62 Lastly,
pleadings based on fraud by hindsight are not actionable as a matter of law.63
The required level of scienter under Section 10(b) is either “intent to
deceive, manipulate, or defraud”64 or “reckless disregard for the truth.”65 Plaintiffs
may meet this standard by “alleging facts (1) showing that the defendants had both
motive and opportunity to commit the fraud or (2) constituting strong circumstantial
evidence of conscious misbehavior or recklessness.”66 Under the latter theory,
plaintiffs must allege that the defendants have engaged in “conduct which is highly
unreasonable and which represents an extreme departure from the standards of
ordinary care to the extent that the danger was either known to the defendant or so
Slayton, 604 F.3d at 773.
See Caiafa v. Sea Containers, Ltd., 525 F. Supp. 2d 398, 410-11
Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976).
South Cherry St., LLC v. Hennessee Grp. LLC, 573 F.3d 98, 109 (2d
Cir. 2009) (“By reckless disregard for the truth, we mean ‘conscious recklessness
— i.e., a state of mind approximating actual intent, and not merely a heightened
form of negligence.’”) (quoting Novak v. Kasaks, 216 F.3d 300, 308 (2d Cir.
ATSI, 493 F.3d at 99 (citing Ganino v. Citizens United Co., 228 F.3d
154, 168-69 (2d Cir. 2000)).
obvious that the defendant must have been aware of it.”67 “[S]ecurities fraud claims
typically have sufficed to state a claim based on recklessness when they have
specifically alleged defendants’ knowledge of facts or access to information
contradicting their public statements. Under such circumstances, defendants knew
or, more importantly, should have known that they were misrepresenting material
facts related to the corporation.”68 An inference of scienter “must be more than
merely plausible or reasonable — it must be cogent and at least as compelling as
any opposing inference of nonfraudulent intent.”69
A securities fraud plaintiff is required to “prove both transaction
causation (also known as reliance) and loss causation.”70 Loss causation is “the
proximate causal link between the alleged misconduct and the plaintiff’s economic
Kalnit v. Eichler, 264 F.3d 131, 142 (2d Cir. 2001) (quotation marks
and citations omitted).
Novak, 216 F.3d at 308.
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 314
(2007). Accord Sawabeh Info. Servs. Co. v. Brody, 832 F. Supp. 2d 280, 295
(S.D.N.Y. 2011) (noting that “the tie . . . goes to the plaintiff” (quotation marks and
ATSI, 493 F.3d at 106. Defendants do not dispute transaction
harm.”71 “A misrepresentation is ‘the proximate cause of an investment loss if the
risk that caused the loss was within the zone of risk concealed by the
misrepresentations . . . .’”72 Therefore, “to plead loss causation, the complaint
must allege facts that support an inference that [defendant’s] misstatements and
omissions concealed the circumstances that bear upon the loss suffered such that
plaintiffs would have been spared all or an ascertainable portion of that loss absent
Section 20(a) of the Exchange Act
Section 20(a) of the Exchange Act creates a cause of action against
“control persons” of the primary violator.74 “To establish a prima facie case of
control person liability, a plaintiff must show (1) a primary violation by the
controlled person, (2) control of the primary violator by the defendant, and (3) that
the defendant was, in some meaningful sense, a culpable participant in the
Id. at 106-07 (citing Dura Pharm., Inc. v. Broudo, 544 U.S. 336, 346
(2005); Lentell v. Merrill Lynch & Co., Inc., 396 F.3d 161, 172 (2d Cir. 2005)).
Accord Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 157 (2d Cir. 2007).
In re Omnicom Grp., Inc. Sec. Litig., 597 F.3d 501, 513 (2d Cir. 2010)
(quoting Lentell, 396 F.3d at 173) (emphasis in original).
Lentell, 396 F.3d at 175.
See 15 U.S.C. § 78t(a).
controlled person’s fraud.”75 Where there is no primary violation, there can be no
“control person” liability under Section 20(a).76
Plaintiffs Are Entitled to Rely on Allegations from the NYAG
Defendants argue that under Rule 11 of the Federal Rules of Civil
Procedure, the Court should strike plaintiffs’ allegations or give them no weight
because “they are entirely (and impermissibly) premised on an unadjudicated
complaint brought by the NYAG . . . without any investigation by plaintiffs as to
their truth or falsity.”77 However, permitting plaintiffs to borrow allegations from
the NYAG’s complaint is warranted at this stage in the litigation. The facts are
derived from a credible complaint based on facts obtained after an investigation.78
In addition, counsel for plaintiffs have indicated that they have reached out to
attorneys at the NYAG to verify the allegations in the Complaint.
ATSI, 493 F.3d at 108.
See id. See also In re eSpeed, Inc. Sec. Litig., 457 F. Supp. 2d 266,
297-98 (S.D.N.Y. 2006).
Def. Mem. at 15.
See, e.g., In re Bear Stearns Mortg. Pass-Through Certificates Litig.,
851 F. Supp. 2d 746, 768 n.24 (S.D.N.Y. 2012) (stating that complaints containing
detailed factual information may be appropriate for borrowing).
While there is no basis to strike the Complaint at this time, plaintiffs
have an ongoing obligation under Rule 11. Plaintiffs should amend the Complaint
to eliminate any allegations that are false or inaccurate.79 At that time, plaintiffs
should also describe the independent investigations they have done to verify the
allegations in the Complaint.
Barclays’ Statements Regarding Its Business Practices and Risk
Controls Are Not Actionable Misstatements
General Statements Regarding Business Practices and Risk
Defendants argue that Barclays’ statements about its business practices
and risk controls are too general to be actionable.80 This includes statements such
as “Barclays has clear risk management objectives, and a well-established strategy
and framework for managing risk[,]” “[a]nother key focus over 2013 and the
coming years is rebuilding the trust that customers, clients, and stakeholders have in
our organisation[, and w]e have pledged to increase transparency and conduct our
business in the right way, as set out in our values.”81
As courts in this Circuit routinely hold, such “general statements about
See, e.g., Def. Mem. at 15-16 (describing allegations copied from
NYAG action that are factually incorrect).
See id. at 17-22.
Compl. ¶¶ 130, 176, 190.
reputation, integrity, and compliance with ethical norms are inactionable ‘puffery,’
meaning that they are ‘too general to cause a reasonable investor to rely upon
them.’”82 The alleged misstatements based on general business practices and risk
controls contained in paragraphs 130, 134, 137, 138, 140, 147, 149, 176, 185-186,
and 190 are not actionable because they are too general to have been relied upon by
a reasonable investor.83
Statements Responding to the Salz Report
Plaintiffs argue that statements following the Salz report are actionable
City of Pontiac Policemen’s & Firemen’s Ret. Sys. v. UBS AG, 752
F.3d 173, 183 (2d Cir. 2014) (quoting ECA, 553 F.3d at 206). Accord ECA, 553
F.3d at 206 (stating that “[n]o investor would take such statements [about integrity
and risk management] seriously in assessing a potential investment, for the simple
fact that almost every investment bank makes these statements”); Boca Raton
Firefighters & Police Pension Fund v. Bahash, 506 Fed. App’x 32, 37 (2d Cir.
2012) (holding that statements regarding a company’s “dedication towards
transparent and independent decision-making” are too “generic [and] indefinite” to
form the basis of a fraud claim).
See Gusinsky v. Barclays PLC, 944 F. Supp. 2d 279, 288-89
(S.D.N.Y. 2013), aff’d in part and rev’d in part on other grounds sub nom.
Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, 750 F.3d 227, 236
(2d Cir. 2014) (holding that statements substantially similar to the ones at issue
here are actionable puffery, including statements such as “Barclays has clear risk
management objectives and a well-established strategy to deliver them, through
core risk management processes” and “Barclays is committed to operating within a
strong system of internal control that enables business to be transacted and risk
taken without exposing itself to unacceptable potential losses or reputational
damage,” which closely resemble paragraphs 130, 147, 149, 176, and 186 of the
because they address a specific problem — restoring Barclays’ reputation following
the LIBOR scandal.84 In making this argument, plaintiffs rely heavily on In re BP
P.L.S. Securities Litigation.85 In that case, shareholders argued that the Deepwater
Horizon explosion supported the claim that BP’s statements about its
implementation of safety measures following several earlier oil refinery accidents
were false or misleading. The statements in BP were actionable because the
Deepwater Horizon disaster was “so similar to prior disasters — the culmination of
corner-cutting, overlooked and disregarded warnings, a lack of oversight, a failure
to train employees properly, and long overdue maintenance — that it raised a
genuine question as to whether BP was truly making the progress it claimed.”86 The
court applied those facts to the principle that “[a] repeated utterance, even on a
promise of progress, can become misleading where repetition becomes a statement
of current and ongoing compliance.”87
Plaintiffs’ Opposition to Defendants’ Motion to Dismiss the Amended
Complaint (“Pl. Opp.”), at 12-18 (arguing that following the Salz report, which
made thirty-four “formal recommendations, . . . Barclays embarked on a marketing
campaign designed to clean up its reputation and regain the public’s trust”). The
alleged misstatements made in response to the Salz report are found at paragraphs
153, 155, 157, 159, and 161 of the Complaint.
843 F. Supp. 2d 712 (S.D. Tex. 2012).
Id. at 758.
Id. at 759.
However, the Complaint does not permit the same inference with
respect to Barclays. Barclays’ statements regarding the Salz report did not directly
reference LX, had not become a statement of current and ongoing compliance, and
lacked the requisite specificity. The allegations fail to connect the statements made
in response to the Salz report to the alleged fraud at LX. Plaintiffs contend that
these statements relate to LX because Barclays “represented and reinforced the
commitment to implement the Salz recommendations across the entire bank”88 and
that recommendations were focused on avoiding reputational risks. But these links
are too tenuous to support liability under the securities laws. If they did,
then every individual who purchased the stock of a company that
was later discovered to have broken any law could theoretically
sue for fraud. This is precisely what the Second Circuit sought to
avoid when it declined to “‘bring within the sweep of federal
securities laws many routine representations made by investment
While courts have held that fraud is adequately alleged “where
statements touting risk management [are] . . . juxtaposed against detailed factual
Pl. Opp. at 19 (emphasis in original).
Gusinksy, 944 F. Supp. 2d at 289-90 (quoting Bahash, 506 Fed.
App’x at 37 (quoting ECA, 553 F.3d at 206)). Accord In re Australia & N.Z.
Banking Grp. Ltd. Sec. Litig., No. 08-cv-11278, 2009 WL 4823923, at *14
(S.D.N.Y. Dec. 14, 2009) (finding statements not false or misleading where the
“[alleged] fraud consisted of ANZ’s misrepresentation of its ‘equity finance
practices’” but “[t]hose practices . . . are not the subject of the representations cited
in the Complaint”).
descriptions of the Company’s woefully inadequate or non-existent credit risk
procedures,”90 plaintiffs have failed to “demonstrate with specificity why and how”
the statements here are false or misleading.91 The most specific allegation is that
Barclays did not implement certain “specific” controls, such as reviewing email
communications. However, neither the Salz report nor Barclays’ response to it
mention reviewing email communications or any other specific controls.
The Complaint also generally alleges that the purported fraud at LX
renders false Barclays’ statements that its new risk culture and control framework
“will also be strengthened by actions to reinforce a control and compliance culture
throughout the bank” and that “implementation of the framework will incorporate
mechanisms to ensure that conduct, reputational and operational risks are fully
factored into business decisions and governance.”92 Likewise the alleged fraud at
LX is claimed to make false the statement that Barclays is “committed to robust
oversight in the form of a world-class compliance function” and that it “will
reinforce a culture of compliance throughout the bank via a combination of training,
Freudenberg v. E*Trade Fin. Corp., 712 F. Supp. 2d 171, 190
Rombach, 164 F.3d at 174.
Compl. ¶ 157.
discussion forums and performance management.”93
But the fact that White lied about the “transparency and safeguards of
its dark pool in a quest to boost profits” does not support an inference that Barclays
was not in fact committed to making changes or adopting a consistent set of
practices.94 The problem is that the Complaint does not set forth specific allegations
that suggest that the conduct of Barclays’ Equities Electronic Trading division —
an entity contributing approximately 0.1 percent of Barclays’ revenue — is
“representative of [Barclays’ compliance efforts in its other divisions], or material
to the company’s overall financial condition.”95 Thus, unlike in BP, the Complaint
fails to link Barclays’ efforts to address its past misconduct with the fraud at LX;
Id. ¶ 161.
The word “transparency” has several meanings. In Barclays’ response
to the Salz report, Barclays indicates in the introduction that “[t]his report is our
response to those recommendations and strives to outline our approach to
implementing each of those in a clear and transparent fashion.” Id. ¶ 153. Barclays
also represented that “[i]n the spirit of transparency and rebuilding trust, Barclays
will publish updates on [its] progress in [its] implementation programme.” Id. ¶
33. The Complaint also states that Barclays’ 2013 Annual Report disclosed that
“[a]nother key focus over 2013 and the coming years is rebuilding the trust that
customers, clients, and stakeholders have in our organisation. We have pledged to
increase transparency and conduct our business in the right way, as set out in our
values.” Id. ¶ 190. The first two statements refer to being open about
implementing the Salz recommendations. The Complaint does not allege that
Barclays failed to be open about this process. The meaning of transparency in the
last statement, which is paradigmatic puffery, is unclear.
Rombach, 164 F.3d at 174.
and unlike in Freudenberg v. E*Trade Financial Corporation, the Complaint fails
to detail the lack of controls that made the fraud at LX possible.96
Moreover, Barclays never said that it had completed implementation of
the Salz recommendations. To the contrary, Barclays stated that it “aim[ed] to have
This case is also different from In re Barrick Gold Sec. Litig., No. 13cv-3851, 2015 WL 1514597, at *13-14 (S.D.N.Y. Apr. 1, 2015), in which Barrick
was required to establish internal controls that provide assurances regarding the
achievement of objectives. In that case, Barrick certified that its internal controls
were effective, the fraud was directly related to a failure of those controls, and the
fraud occurred at a key company project. See also City of Brockton Ret. Sys. v.
Avon Prods., Inc., No. 11-cv-4665, 2014 WL 4832321, at *16 (S.D.N.Y. Sept. 29,
2014) (“A reasonable investor could interpret Avon’s statements about its
allegedly elaborate internal controls operation as reflecting concrete steps that
Avon had taken in this area, and might rely upon these statements as a guarantee
that such steps had, in fact, been implemented.”); In re Goldman Sachs Group, Inc.
Sec. Litig., No. 10-cv-3461, 2014 WL 2815571, at *4-5 (S.D.N.Y. June 23, 2014)
(“Goldman’s representations about its purported controls for avoiding conflicts
were directly at odds with its alleged conduct. For instance, Goldman represented
that ‘[w]e have extensive procedures and controls that are designed to . . . address
conflicts of interest’ and ‘we increasingly have to address potential conflicts of
interest, including situations where our services to a particular client or our own
proprietary investments or other interests conflict, or are perceived to conflict, with
the interest of another client. . . .’ Meanwhile, Goldman is alleged to have sold
financial products to clients despite clear and egregious conflicts of interest —
indeed, where its ‘services to a particular client’ . . . and its ‘own proprietary
investments’ . . . ‘conflict[ed] with the interest of [the] other client[s]’ investing in
those deals.”) (citations omitted); In re UBS AG Sec. Litig., No. 07-cv-11225, 2012
WL 4471265, at *36 (S.D.N.Y. Sept. 28, 2012) (distinguishing statements that
were mere puffery from “qualitative assurances and affirmative guarantees
regarding . . . specific steps [the Defendant] had taken to achieve particular
the majority of all the [Salz report] recommendations implemented by 2015.”97 But
plaintiffs commenced this action in July of 2014, based on earlier conduct.
Accordingly, no reasonable investor could believe that Barclays’ statements in
response to the Salz report were “a statement of current and ongoing compliance.”98
Finally, it is well settled in this Circuit that it is the generic nature of
the statement that makes it puffery, and this quality is not typically altered by
context.99 Statements that Barclays’ “new risk culture and control framework ‘will
also be strengthened by actions to reinforce a control and compliance structure’” or
describing Barclays’ “world-class compliance function” are nearly identical to
statements that have been held to be non-actionable puffery by courts in this
Compl. ¶ 33 (emphasis added).
BP, 843 F. Supp. 2d at 759.
See UBS AG, 752 F.3d at 183 (“It is well-established that general
statements about reputation, integrity, and compliance with ethical norms are
inactionable ‘puffery,’ meaning that they are ‘too general to cause a reasonable
investor to rely upon them.’ This is particularly true where, as here, the statements
are explicitly aspirational, with qualifiers such as ‘aims to,’ ‘wants to,’ and
‘should.’ Plaintiffs’ claim that these statements were knowingly and verifiably
false when made does not cure their generality, which is what prevents them from
rising to the level of materiality required to form the basis for assessing a potential
investment.”) (quoting ECA, 553 F.3d at 206); Bahash, 506 Fed. App’x at 37
(explaining that “[t]he ‘puffery’ designation . . . stems from the generic, indefinite
nature of the statements at issue, not their scope”).
As already noted, Barclays’ statements are not only generic, but are for
the most part aspirational. However, the statements that purport to describe what
Barclays had already accomplished are also “too open-ended and subjective to
constitute a guarantee” that fraudulent conduct would not again occur at Barclays.101
This applies to the statements that “Barclays’ Investment Bank adopted new
processes for effectively learning from mistakes in 2012 following an internal
review,” which “allow[s] Barclays to understand and address underlying root causes
of issues and apply lessons learned more broadly.”102 Accordingly, the alleged
misstatements made in response to the Salz report are inactionable puffery.
The Misrepresentations Regarding LX
According to plaintiffs, “[i]n an effort to propel LX to the very top, . . .
See, e.g., C.D.T.S. No. 1, No. 12-cv-4924, 2013 WL 6576031, at *4-5
(S.D.N.Y. Dec. 13, 2013) (holding that statements regarding the bank’s new
“controlled and disciplined risk culture” were inactionable puffery); In re Gentiva
Sec. Litig., 932 F. Supp. 2d 352, 370 (E.D.N.Y. 2013) (holding that statements
regarding a bank’s “best-of-class” compliance program were puffery). Likewise,
the court in BP dismissed as puffery many generalized statements similar to those
at issue here. For example, the court dismissed statements BP made about its
“commitment to safety” and its “progress” towards improving its safety, noting
that “general ‘progress’ is simply too illusory a metric” to be actionable. 843 F.
Supp. 2d at 757.
UBS AG, 752 F.3d at 186.
Compl. ¶ 159.
Barclays embarked on a mission to mislead the market about the transparency and
safeguards of its dark pool.”103 Barclays “touted Liquidity Profiling as a
‘sophisticated surveillance framework, helping to protect [clients] from predatory
trading . . . .’”104 And White stated in trade journals and in a comment letter to the
Financial Industry Regulatory Authority that, with respect to LX, “the biggest
theme of the  year was transparency,” and that “Barclays belie[ves] that
transparency is not only important but benefits both our clients and the market.”105
White also said in trade journals and in presentation slides he used at
the American Enterprise Institute conference that Barclays “monitors client orders
Pl. Opp. at 27.
Id. (quoting Compl. ¶ 67).
Compl. ¶¶ 165, 169, 181, 183. The Complaint states that a certain
Liquidity Landscape Chart misrepresented the extent of trading by HFTs on LX
because Tradebot, one of the largest participants in the pool, was not included in
the chart. See id. ¶¶ 132-133. The Complaint also alleges that Barclays gave some
clients confidential marketing materials that described factors Barclays considered
in assigning the Liquidity Profiling ratings that clients could use to block
aggressive counterparties, but that Barclays did not disclose several features. See
id. ¶¶ 45-46, 64, 93, 123, 128, 143, 145. However, plaintiffs do not allege that
these documents were disclosed publicly or to Barclays ADS holders. Plaintiffs
cannot rely on the “fraud on the market” presumption of reliance because they
cannot plausibly allege that the statements contained in these materials were
intended to affect the price for Barclays ADSs or even that they reached the
market. See Stoneridge Inv. Partners, LLC, 552 U.S. at 159. The same holds true
for plaintiffs’ allegations regarding latency arbitrage and the internalization
statistic. See Compl. ¶¶ 102, 109-112.
continuously” on LX, has “controls” and “safeguards to manage toxicity” on LX
and “can take corrective action” if necessary. Further, White stated that by
“understanding the characteristics of flow at the client level, Barclays can improve
the overall quality of LX liquidity: . . . high alpha takers [i.e., aggressive traders]
can be held accountable, e.g., by demanding liquidity providing strategies, or by
refusing a client access.”106 Plaintiffs allege that these statements were misleading
because Barclays did not disclose that it did not eliminate traders who behaved in a
predatory manner, did not restrict predatory traders access to LX, did not monitor
client orders continuously, and did not apply Liquidity Profiling to some trading
activity in LX.107 In fact, plaintiffs allege, Barclays encouraged predatory traders to
In addition, slides White used at the AEI conference indicated that
Barclays’ order router would “send orders to . . . venues with the greatest
likelihood of fill.”108 And White told trade journals that Barclays’ order router
“constantly examines market conditions in real time and adjusts its order-handling
Compl. ¶¶ 122, 127, 144, 151, 163.
See id. ¶¶ 123, 128, 143, 145, 152, 164, 167, 172, 194.
Id. ¶ 125.
strategy immediately.”109 Plaintiffs contend that these statements were misleading
because Barclays did not disclose that an “internal analysis” found that orders
unfilled on LX were “routed disproportionately to other trading venues based on
where Barclays had been most profitable” and that client orders were routed to LX
at a “high rate.”110
The Complaint Adequately Pleads Materiality
Defendants argue that plaintiffs have not alleged “any facts suggesting
that statements about LX could have been material to any investor in Barclays
PLC.”111 According to defendants, “[t]he bare fact that Barclays’ ADS price
dropped after the NYAG sued Barclays does not suffice to show materiality because
the stock drop could reflect the market’s reaction to additional regulatory scrutiny
of Barclays — rather than a reaction to the correction of prior alleged misstatements
Materiality is a fact-intensive inquiry that is ordinarily inappropriate
for resolution on a motion to dismiss.113 As defendants correctly note, the Second
Id. ¶ 163.
Id. ¶¶ 105, 108.
Def. Mem. at 23.
See Ganino, 228 F.3d at 162.
Circuit follows the quantitative and qualitative factors set forth in SEC Staff
Accounting Bulletin No. 99 (“SAB No. 99”).114 Under the quantitative factor, the
SEC considers the financial magnitude of the misstatement. The “use of a
percentage as a numerical threshold, such as 5%, may provide the basis” for
determining whether an alleged misstatement could be material.115 Under the
qualitative factor, the SEC considers: (1) whether there was a concealment of an
unlawful transaction; (2) the significance of the misstatement in relation to the
company’s operations; and (3) management’s expectation that the misstatement will
result in a significant market reaction.116 At the same time, the Second Circuit has
“consistently rejected a formulaic approach to assessing the materiality of an
alleged misrepresentation.”117 Thus, to plead materiality a plaintiff must
specifically identify qualitative factors demonstrating a substantial likelihood that a
reasonable shareholder would think that the addition of that fact “significantly
alter[s] the ‘total mix’ of information made available.”118
See SAB No. 99, 64 Fed. Reg. 45150, 45150-52 (1999).
ECA, 553 F.3d at 204 (quotation marks omitted).
Hutchison v. Deutsche Bank Sec. Inc., 647 F.3d 479, 485 (2d Cir.
Id. Accord ECA, 553 F.3d at 198 (“While SAB No. 99 does not
change the standard of materiality, we consider the factors it sets forth in
Plaintiffs’ allegations and publicly available documents indicate that
LX’s revenue in relation to the overall revenue of Barclays PLC is far below the
five percent threshold.119 Despite this, the Complaint adequately alleges materiality.
Barclays had staked its “long-term performance” on restoring its integrity.120 As
alleged, the specific misstatements about LX — which include touting its safety
while secretly encouraging predatory behavior — call into question the integrity of
the company as a whole. For this reason, it is inappropriate to focus only on the
revenue stream of LX when assessing the quantitative factor. Likewise, SAB No.
99 permits consideration of market reaction in instances where management expects
“that a known misstatement may result in a significant positive or negative market
reaction.” Drawing all reasonable inference in plaintiffs’ favor, the Complaint
adequately alleges Barclays’ past scandals, its efforts to restore its reputation, and,
determining whether the misstatement significantly altered the ‘total mix’ of
information available to investors.”).
Plaintiffs allege that LX reflected a revenue “growth opportunity” of
“between $37 and $50 million per year.” Compl. ¶ 54. Barclays’ annual income
from 2011 and 2013 was between twenty-five and roughly thirty-three billion
pounds. See 3/9/14 Barclays PLC, 2013 Annual Report (Form 20-F). That means
that LX accounted for 0.1 percent of Barclays PLC’s total revenue.
Compl. ¶ 138 (Jenkins stated that “I believe Barclays will only be a
valuable business if it is a values-driven business. We must operate to the highest
standards if our stakeholders are to trust us and bring their business to Barclays.
Our long-term performance depends on it.”).
most significantly, misrepresentations that go to the heart of the firm’s integrity and
reputation. Accordingly, I cannot conclude as a matter of law that there is not a
“substantial likelihood that a reasonable shareholder would consider [the
misrepresentations about LX] important in deciding how to [act].”121
The Complaint Pleads Scienter as to White
To state a claim for securities fraud, the “scienter allegations must give
rise to a strong inference of fraudulent intent.”122 “A plaintiff can establish this
intent either (a) by alleging facts to show that defendants had both motive and
opportunity to commit fraud, or (b) by alleging facts that constitute strong
circumstantial evidence of conscious misbehavior or recklessness.”123
Motive and Opportunity
The Complaint does not allege that any Individual Defendant other
than White knew about the LX product, much less that they intended to mislead
Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (quotation marks
omitted). This holding does not foreclose defendants from attempting to
demonstrate at a later stage that the price drop was not a reaction to the particular
fraud alleged but to the fact that Barclays was being sued by a regulator. Nor does
it preclude defendants from attempting to demonstrate lack of materiality on other
grounds, including that the alleged misstatements were not in fact false or
Kalnit, 264 F. 3d at 138 (quotation marks omitted).
Id. (quotation marks omitted).
ADS holders with regard to that product. Accordingly, the allegations in the
Complaint are insufficient to allege scienter based on motive as to these defendants.
Plaintiffs contend that White was motivated by the potential
profitability of LX and that “improving LX to be the most successful ATS was also
an imprimatur of prestige.”124 However, it is well settled in this Circuit that general
allegations of a profit or prestige motive are insufficient to allege scienter.125 The
problem is that “plaintiffs’ motive allegations [are] too generalized to demonstrate
defendants’ concrete and personal benefit from the alleged fraud.”126 Furthermore,
“the facts alleged must support an inference of an intent to defraud the plaintiffs
rather than some other group.”127 At most, the allegations relate to White’s motive
Pl. Opp. at 40.
See ECA, 553 F.3d at 201 (holding that “the allegation that
[defendants] had the requisite motive because they received bonuses based on
corporate earnings and higher stock prices does not strengthen the inference of
fraudulent intent”); Teamsters Local 445 Freight Div. Pension Fund v. Dynex
Capital Inc., 531 F.3d 190, 196 (2d Cir. 2008); Kalnit, 264 F.3d at 139-40
(“Insufficient motives, we have held, can include (1) the desire for the corporation
to appear profitable and (2) the desire to keep stock prices high to increase officer
compensation. On the other hand, we have held motive sufficiently pleaded where
plaintiff alleged that defendants misrepresented corporate performance to inflate
stock prices while they sold their own shares.”) (citations omitted); Chill v.
General Elec. Co., 101 F.3d 263, 268 (2d Cir. 1996).
Kalnit, 264 F.3d at 140 (quotation marks omitted).
ECA, 553 F.3d at 198 (citing Kalnit, 264 F.3d at 140-41).
to defraud clients of LX, not ADS holders.
Strong Circumstantial Evidence of Conscious
Misbehavior or Recklessness
Where a plaintiff cannot show motive, circumstantial evidence of
conscious misbehavior or recklessness will suffice. But “the strength of the
circumstantial allegations must be correspondingly greater” in the absence of
motive.128 Plaintiffs argue that Individual Defendants Diamond, Jenkins, Lucas,
and Morzaria had knowledge because they “occupied senior executive positions at
Barclays” and “[a]s champions for a changed Barclays, [they] were responsible for
and had a duty to monitor Barclays’ purported transformation.”129 However,
“[c]ourts in this Circuit have long held that accusations founded on nothing more
than a defendant’s corporate position are entitled to no weight.”130 And the
Complaint has not “specifically identified any reports or statements that would have
come to light in a reasonable investigation and that would have demonstrated the
falsity of the alleged misleading statements.”131
Id. at 199 (quotation marks omitted).
Pl. Opp. at 37.
Plumbers & Steamfitters Local 773 Pension Fund v. Canadian
Imperial Bank of Commerce, 694 F. Supp. 2d 287, 300 (S.D.N.Y. 2010).
Teamsters Local 445, 531 F.3d at 196. Plaintiffs argue that “Jenkins
met regularly with members of the Business Practices Review Committee,” but
Plaintiffs also contend that Individual Defendants Diamond, Jenkins,
Lucas, and Morzaria acted with scienter because they “should have been
particularly diligent” once they were on notice that dark pools were subject to
manipulation.132 And plaintiffs contend that these same defendants were reckless
because they were not sufficiently “diligent in ensuring that Barclays was
implementing sufficient internal controls and procedures designed to prevent
fraud.”133 But these allegations are far too general to give rise to a strong inference
in the absence of a motive.
On the other hand, there is strong circumstantial evidence of conscious
misbehavior or recklessness on the part of White. Not only was White the source of
many of the allegedly false allegations about LX, but he was the head of Equities
Electronic Trading at Barclays, “the driving force behind the Company’s goal to be
the number one dark pool,” and he “held himself [out] to the public as intimately
knowledgeable about LX’s functions and purported transparency.”134
there is no allegation that this Committee presented any information contradicting
the public statements about LX or otherwise raised red flags about the
implementation of LX. Pl. Opp. at 37.
Pl. Opp. at 38.
Id. at 39.
Id. at 34.
For instance, in February 2014, Barclays’ dark pool was named the
“Best Dark Pool” by an industry publication. White attributed its growth to
“Barclays’ commitment to being transparent about how Barclays operates, how
Barclays routes client orders, and the kinds of counterparties traders can expect to
deal with when trading in the dark pool.” White stated that transparency was “the
one issue that we really took a stance on . . . We always come back to transparency
as the key driver — letting [clients] know how we’re interacting with their flow and
what type of flow they’re interacting with.” In addition, he stated that
“[t]ransparency on multiple levels is a selling point for our entire equities
franchise.”135 At the same time, a former Barclays Director in the Equities
Electronic Trading division informed the government that Barclays “purport[s] to
have a toxicity framework that will protect you when everybody knows internally
that the thing is done manually with outliers removed and things are classified only
if they feel like it.”136 Corroborating this Director’s account, another former
Director in the division described Liquidity Profiling as “a scam.”
Compl. ¶ 61; see also id. ¶ 64 (in March 2013, defendant White stated
that Barclays’ dark pool “is an integral part of our electronic trading offering,
providing clients with enhanced execution quality . . . built on transparency and
preventing information leakage. We have built in safeguards to manage toxicity,
and to help our institutional clients understand how to manage their interactions
with high-frequency traders.”).
Id. ¶ 98 (emphasis added).
These allegations are sufficient to create a strong inference of “an
extreme departure from the standards of ordinary care . . . to the extent that the
danger was either known to the defendant or so obvious that the defendant must
have been aware of it.”137 Given the alleged nature of the fraud — whereby
Barclays was touting the safety of LX while at the same time courting predatory
firms — the common knowledge within the group about the fraud, and the
importance of Barclays’ reputation to the company’s continuing success,138 White
either knew or should have known that the disclosure of the fraud would harm
Scienter of the Corporate Defendants
“‘When the defendant is a corporate entity, . . . the pleaded facts must
create a strong inference that someone whose intent could be imputed to the
corporation acted with the requisite scienter.’”139 Here, White is a managementlevel employee and his scienter is properly imputed to Barclays.
ECA, 553 F.3d at 198.
See, e.g., Compl. ¶ 138.
Carpenters Pension Trust Fund of St. Louis, St. Clair Shores Police &
Fire Ret. Sys. v. Barclays PLC, No. 12-cv-5329, 2014 WL 5334053, at *2
(S.D.N.Y. Oct. 20, 2014) (quoting Teamsters Local 445, 531 F.3d at 195). In this
context, “it is possible to raise the required inference [of scienter] with regard to a
corporate defendant without doing so with regard to a specific individual
defendant.” Id. (quotation marks omitted).
Loss Causation as to the June 27 Telegraph Article
Defendants contend that the Court should dismiss any claim for losses
allegedly incurred on June 30, 2014, as a result of the June 27 Telegraph report.
Defendants argue that because the article does not reveal a new fraud, the
Complaint does not adequately plead loss causation. Defendants also assert that the
market had already reacted to the corrective disclosure of the NYAG complaint, and
the only information added in the June 27 article was speculation about the size of a
possible fine.140 A review of the article supports the defendants’ arguments. The
analyst’s speculation about the size of a possible fine and the opinion about the
relative importance of the scandal do not reveal any new truth about the alleged
Control Person Liability
The Complaint adequately pleads a primary violation as to Barclays
and White. It also pleads that White and Individual Defendants Diamond, the
See Def. Mem. at 42-43.
See Janbay v. Canadian Solar, Inc., No. 10-cv-4430, 2012 WL
1080306, at *16 (S.D.N.Y. Mar. 30, 2012) (stating that “the raising of questions
and speculation by analysts and commentators does not reveal any ‘truth’ about an
alleged fraud) (citing In re Omnicom Group, Inc. Sec. Litig., 597 F.3d at 510
holding that “negative journalistic characterization of previously disclosed facts
does not constitute a corrective disclosure”)).
former CEO, and Jenkins, who replaced Diamond as CEO in August 2012 and
continues to hold that position, are control persons for purposes of section 20(a).
Although Individual Defendants Lucas and Morzaria, who were both Finance
Directors, would likely have had control over statements in Barclays’ SEC filings,
none of the actionable statements remaining in the case were in those filings.
Accordingly, the Complaint does not adequately allege a section 20(a) claim against
Individual Defendants Lucas and Morzaria.
Leave to Replead
Plaintiffs request leave to amend in the event any portion of
defendants’ motion is granted. Leave to amend should be freely given “when
justice so requires.”142 However, plaintiffs already had an opportunity to amend
their claims and had notice of defendants’ anticipated defenses prior to the filing of
this motion to dismiss.143 Moreover, any further amendment would be futile. The
alleged misstatements about Barclays’ business practices and internal controls and
in response to the Salz report are too general to be actionable; and, because these
statements are not actionable, there is no basis for section 20(a) liability against
Fed. R. Civ. P. 15(a)(2).
See Individual Rules and Procedures of Judge Shira A. Scheindlin,
Rule IV.B (stating that parties must exchange letters prior to bringing a motion to
dismiss to “attempt to eliminate the need for [the] motion”).
Individual Defendants Lucas and Morzaria.
For the foregoing 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 identified herein are deemed inactionable and
plaintiffs may not seek damages based on the June 27 Telegraph article). Plaintiffs
shall amend the Complaint within thirty days to comply with their obligations under
Rule 11 as noted in section IV.A of this Opinion and Order. The Clerk of the Court
is directed to close this motion (Docket No. 28). A conference is scheduled for
May 5, 2015 at 4:30 p.m.
New York, New York
April 24, 2015
- Appearances For Plaintiffs:
Jeremy A. Lieberman, Esq.
Emma Gilmore, Esq.
600 Third Avenue, 20th Floor
New York, New York 10016
Jeffrey T. Scott, Esq.
David H. Braff, Esq.
Matthew A. Schwartz, Esq.
Andrew H. Reynard, Esq.
John J. Hughes, III, Esq.
Sullivan & Cromwell LLP
125 Broad St.
New York, New York 10004
Patrick V. Dahlstrom, Esq.
10 South La Salle Street, Suite 3505
Chicago, Illinois 60603
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