Wednesday, October 8, 2014

NY Attorney General Going too Far?

New York Attorney General Eric Schneiderman filed a lawsuit in June against Barclays PLC accusing the bank of giving an unfair edge to high-frequency traders and lying to other customers about it.
Barclays has now moved to dismiss the complaint, and it said in its court filing that Schneiderman was trying to dramatically expand the powers of the Martin Act, the New York securities statute. According to Reuters, Barclays is arguing that the Martin Act is designed to protect investors in connection with the purchase or sale of a security, and since Schneiderman had conceded in an earlier filing that the lawsuit was based on claims that Barclays had misrepresented how it operated its dark pool rather than about any particular security transaction, the lawsuit cannot be maintained and is beyond the scope of the Martin Act.
"The NYAG's reading of the Martin Act would render the Act virtually unlimited in scope," Barclays said in the filing, a response to Schneiderman's Sept. 16 filing disputing an earlier motion to dismiss the case.
I am not involved in the case, but have been involved in numerous cases brought under the Martin Act. I agree with the legal argument -  allegations that the workings of a "dark pool" were misrepresented is NOT a fraud "engaged in to induce or promote the issuance, distribution, exchange, sale, negotiation or purchase of securities" which is the requirement for a claim under the Martin Act.
However, we faced the same issue years ago with the misappropriation theory of insider trading. Rule 10b-5 requires a fraud "in connection with the purchase or sale of a security." In the 1980s the SEC started bringing claims where the fraud had nothing to do with the actual purchase or sale of a security. The accused did not commit any fraud in connection with the transaction, in those cases the SEC alleged that the defendant committed a fraud in obtaining information and used that information to purchase a security.
My partner and I made that argument at trial, and at the Second Circuit, and in our petition to the United States Supreme Court, to no avail. SEC vs. Materia, 745 F. 2d 197 (2d Cir. 1984) The courts completely re-wrote the statute and figuratively removed the phrase "in connection with the purchase or sale of a security." Years later the Supreme Court adopted this misreading, in United States v. O'Hagan, 521 U.S. 642 (1997)
Barclays has a chance to make law here, but given broad interpretation given to 10b-5, that is going to be a long shot.
For those who are interested:
Section 352-c.

The Martin Act contains both misdemeanor and felony criminal provisions. N.Y. Gen Bus. Law §352-c (McKinney 1996). Subsections one and two of Section 352-c delineate misdemeanor offenses. Id. at §352-c(1) & (2). Subsections five and six define related applicable felony offenses. Id. at §352-c(5) & (6).
Section 352-c(1) makes the following actions misdemeanors when engaged in to induce or promote the issuance, distribution, exchange, sale, negotiation or purchase of securities:
(a) Any fraud, deception, concealment, suppression, false pretense or fictitious or pretended purchase or sale;
(b) Any promise or representation as to the future which is beyond reasonable expectation or unwarranted by existing circumstances;
(c) Any representation or statement which is false, where the person who made such representation or statement:
(i) knew the truth; or
(ii) with reasonable effort could have known the truth; or
(iii) made no reasonable effort to ascertain the truth; or
(iv) did not have knowledge concerning the representation or statement made;
N.Y. Gen Bus. Law §352-c(1) (McKinney 1996).
For more information - Barclays says New York 'dark pool' suit oversteps legal bounds

--- The attorneys at Sallah Astarita & Cox include veteran securities litigators and former SEC Enforcement Attorneys. We have decades of experience in securities litigation matters, including the defense of enforcement actions and representation of investors, financial professionals and investment firms, nationwide. For more information call 212-509-6544 or send an email.
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