OPINION OF THE COURT
Defendants Barclays Capital Inc. and Barclays PLC (collectively, Barclays) move, pursuant to CPLR 3211, to dismiss the original complaint filed by plaintiff, the Attorney General of the State of New York (the NYAG). Defendants’ motion is granted in part and denied in part for the reasons that follow.
I. Background
This is an action by the NYAG to hold Barclays liable for allegedly false and misleading statements made about its dark pool, known as “Barclays LX” (the Dark Pool). A dark pool, an “Alternative Trading System” (ATS), is a private securities trading platform used to execute securities trades anonymously, unlike public exchanges, such as the New York Stock Exchange.
A reality of modern finance is that a substantial percentage of trading activity is conducted by computer algorithms programmed to rapidly trade large amounts of equities at speeds faster than any person could replicate manually. This is known as “high frequency trading” (HFT). Since trading on public venues is “lit,” meaning that order data is immediately made public, opportunities exist for savvy algorithms to beat manual orders (or less savvy algorithms) on lit exchanges. This occurs, for instance, when an institutional investor’s large order sought to be filled on a public venue may, due to its size, have to be filled across multiple exchanges. Algorithms can
Dark pool trading, as its name suggests, is supposed to be “dark.” Dark pools can process “unlit” trades because federal securities regulations permit them to not disclose trade data in real time. (See docket 33 at 10, comparing 17 CFR 242.301 [requirements for alternative trading systems], with 17 CFR 242.602 [dissemination of quotations in NMS (National Market System) securities].) Therefore, in dark pools, the ways in which HFT can leverage technological superiority are (supposed to be) more limited. Benefits include the ability to potentially execute very large trades without moving the market before the trade is fully executed. For this reason, dark pools tend to attract some of the largest and most sophisticated securities traders, such as pension funds. These sophisticated, institutional investors are the only targets of Barclays’ Dark Pool marketing materials. Hence, by definition, the type of fraud alleged here was carried out by highly sophisticated financial experts and harmed highly sophisticated financial experts. Consequently, the scope of what can be considered material to a decision to trade in a dark pool cannot be viewed from the perspective of a layperson. Instead, the information must be something that a trader at an institutional investor would find to be material.
In this case, the NYAG alleges that the Dark Pool was not functioning as advertised. Rather, the Dark Pool, for various alleged reasons, retained many of the downsides of trading on a public exchange. For instance, the complaint alleges that Barclays, in contravention of representations made to inves
Here, however, it is essential to keep in mind that this lawsuit is not, nor could it be, about the legality of the trading in the Dark Pool. Rather, this case is only about whether Bar-clays’ representations about the Dark Pool are fraudulent under the Martin Act. Despite the broad scope of the Martin Act, discussed below, it is a statute that only gives rise to liability when misrepresentations are made. Liability under the Martin Act does not exist simply because a bank’s dark pool did not comply with federal securities regulations.
Yet, the NYAG may hold financial institutions, such as Bar-clays, liable if they lie to investors about material facts about how their dark pool operates. As discussed below, the Martin Act does permit the NYAG to police dark pools in this limited manner, notwithstanding Barclays’ arguments to the contrary. The very point of dark pools is to function as an alternative to the default trading realities of public exchanges. Traders are entitled to rely on material representations banks make about their dark pools. If such representations are untrue, the integrity of dark pools will be compromised and investor confidence in them will be shaken. On this motion, however, the court will not reach the issue of whether the NYAG has adequately pleaded actionable, fraudulent misrepresentations. Recent procedural developments have altered the scope of this decision.
II. Procedural History
To explain, the NYAG commenced this action by filing a complaint (the original complaint) on June 25, 2014. (See docket 1.) The original complaint asserts two causes of action: (1) securities fraud under the Martin Act; and (2) persistent fraud and illegality under the Executive Law. Barclays moved to dismiss on July 24, 2014.
That being said, it should go without saying that a Martin Act claim cannot be based on representations on which no reasonable sophisticated investor (the only investors who trade in dark pools) would rely. Drafts of PowerPoint marketing decks
As for Barclays’ motion to quash, it was agreed that the motion will be decided with the NYAG’s own forthcoming motion to enforce its subpoenas. (See docket 71.) The NYAG’s motion was filed on January 30, 2015. (See docket 63.) Oral argument on the subpoena motions is scheduled to take place on March 11, 2015.
III. Discussion
A. Legal Standard
On a motion to dismiss, the court must accept as true the facts alleged in the complaint as well as all reasonable inferences that may be gleaned from those facts. (Amaro v Gani Realty Corp.,
“The Martin Act — New York’s ‘blue sky’ law — ‘authorizes the Attorney General to investigate and enjoin fraudulent practices in the marketing of stocks, bonds and other securities within or from New York.’ ” (Assured Guar. [UK] Ltd. v J.P. Morgan Inv. Mgt. Inc.,
“The purpose of the Martin Act was ‘to create a statutory mechanism in which the Attorney-General would have broad regulatory and remedial powers to prevent fraudulent securities practices by investigating and intervening at the first indication of possible securities fraud on the public and, thereafter, if appropriate, to commence civil or criminal prosecution.’ ” (People v Credit Suisse Sec. [USA] LLC,46 Misc 3d 1211[A] ,2014 NY Slip Op 51912[U] , *3 [Sup Ct, NY County 2014, Friedman, J.], quoting Assured,18 NY3d at 350-351 .)
The Martin Act is not a narrow statute. Rather, the Court of Appeals has long held that the Martin Act “should be liberally construed to give effect to its remedial purpose of protecting the public from fraudulent exploitation in the offer and sale of securities.” (East Midtown Plaza Hous. Co., Inc. v Cuomo,
Barclays argues that the Martin Act is inapplicable to the allegations asserted by the NYAG in this case because the NYAG does not allege any misrepresentation related to the sale of any particular security. Instead, the NYAG only alleges that Barclays made misrepresentations about the Dark Pool itself. Barclays argues that misrepresentations about the platform or venue through which securities are traded cannot give rise to liability under the Martin Act. Barclays avers that the Martin Act’s scope is limited to misrepresentations that impact an investor’s decision to trade a particular security, but not misrepresentations that induce the investor to execute a desired trade on a particular platform. Stated another way, Barclays takes the position that only representations influencing the decision about the specifics of the trade (e.g., which stock to buy, how much, and at what price) are actionable, but representations influencing the separate decision as to where to execute the desired trade (e.g., which public exchange or dark pool) are not actionable. The NYAG vehemently disagrees.
This is a novel issue. The cases cited by the NYAG and Bar-clays are inapposite. They either do not address this specific issue or involve liability under the federal securities laws which, while similar, are neither worded identically to the Martin Act
Given the reality of how modern securities trading actually occurs — that is, how trading decisions are really made — the notion that the decision about where to execute a trade is not an “investment decision” is unpersuasive because the choice of trading platform can have a significant impact on the outcome of the trade. As discussed earlier, a substantial percentage of all securities trading is conducted by computer algorithms. HFT trades are executed in milliseconds by algorithms programmed to implement previously determined trading strategies. The profitability of algorithmic trading often has nothing to do with anything classically understood to impact corporate value. Instead, much of the profitability of algorithmic trading is predicated on finding opportunities to profit on short term market fluctuations in different venues, with the short term often being milliseconds in duration. Consequently, trading decisions can be inexorably linked to the venue in which the trade occurs, because that venue will impact the profitability of a trade based on timing and counterparty.
Of course, not all trades are actually influenced by choice of venue. However, this lawsuit is primarily about protecting “[l]ong-term investors [such as] mutual funds, pension funds, or retail investors trading from home” (see docket 36 at 10)
Finally, to the extent the applicability of the Martin Act to representations about trading venues can be considered a close call — and, for what it’s worth, Barclays’ arguments are not entirely unreasonable — this court views the Court of Appeals’ guidance on the Martin Act to be that doubts in favor of the Martin Act’s applicability should be resolved in the NYAG’s favor. In other words, if it is a close call, the Martin Act should be held to apply. New York, the center of the financial universe, benefits greatly from having powerful blue sky laws.
C. Executive Law
The NYAG’s Executive Law cause of action, on the other hand, is dismissed. “Executive Law § 63 (12) . . . does not create independent claims, but merely authorizes the Attorney General to seek injunctive and other relief on notice prescribed by the statute in cases involving persistent fraud or illegality.” (People v Charles Schwab & Co., Inc.,
Accordingly, it is ordered that the motion by defendants Bar-clays Capital Inc. and Barclays PLC to dismiss the NYAG’s original complaint is decided as follows: the Executive Law
Notes
. HFT defenders proffer myriad supposed benefits of their existence, such as increased price efficiency and liquidity. This court need not and will not weigh in on the important public policy debate over market structure, as such matters have no legal relevance to this case. HFT is a fact of life on Wall Street, and it is up to the federal securities regulators and Wall Street experts to determine sound market structure policy.
. The NYAG is not suing for violations of federal securities regulations, nor could it. The NYAG lacks the authority to regulate dark pools or to determine the rules under which they may operate.
. Barclays’ operative opening memorandum of law is the one filed on August 8, 2014 (docket 33), which replaced its originally filed brief (docket 12) that exceeded the court’s page limits.
. PowerPoint deck drafts should not give rise to fraud liability. Decks are ubiquitously used in client presentations, and they are obviously edited beforehand (as opposed to bankers’ internal emails, such as those cited by the NYAG). The chilling effect of knowing that a future redline of PowerPoint drafts may give rise to legal liability should not be overlooked. For instance, if a junior banking analyst decides to edit the language in the final version of a deck, a plaintiff may argue that the words in the final version are more “deceptive” than in the draft. The same holds true with the sample liquidity graph, discussed below. The information in the deck actually provided to clients was either true, false, or inactionable opinion/puffery. Fraud liability is restricted to false statements, not statements or images relatively more opaque than those contained in a prior draft.
. The graph labeled “Sample liquidity landscape by category” (see docket 15 at 2) clearly does not represent what the NYAG says it does for the reasons explained in Barclays’ briefs. That chart was not representing the actual composition of the Dark Pool’s traders, and, in any event, that composition was obviously subject to change. Sophisticated investors know this. Hence, that chart is not materially misleading.
. Oral argument on the motion to dismiss the AC will be scheduled after the motion is fully briefed.
. It should be noted that CPLR 3016 (b)’s specificity requirements apply to Martin Act claims because CPLR 3016 (b) applies to all causes of “action based upon fraud, misrepresentation, mistake, [and] willful default.” (See People v Charles Schwab & Co., Inc.,
. The NYAG’s rhetoric about the harms of HFT should be unconvincing to sophisticated readers due to the absence of any meaningful discussion of the complex trade-offs that must be considered when contemplating market structure policy. (See e.g. Matt Levine, SEC Will Keep Thinking About High Frequency Trading, Bloomberg View, June 5, 2014, available at http:// www.bloombergview.com/artieles/2014-06-05/sec-will-keep-thinking-abouthigh-frequency-trading [“The SEC’s core view is that the fundamental business model of high frequency trading is fine. There are probably some abuses at the margins, and shedding some light on those margins will be enough to correct those abuses”].) Whether HFT is, on balance, a good thing for the market is well beyond the scope of this case and the Martin Act. This court is not influenced, nor is it moved, by the NYAG’s public policy arguments (e.g., that an investor may be considered “traditional” does not warrant special protection). For the purposes of this case, either Barclays materiality lied about the Dark Pool or it did not. Moreover, even if trading within the Dark Pool violated federal securities regulations, no Martin Act liability will be found unless Barclays actually lied to investors, in writing, about material facts concerning the Dark Pool. The investors in the Dark Pool are highly sophisticated and, hence, no liability will be found simply on the basis of meaningless words, such as “aggressive,” “predatory,” and “toxic.” Of course, if Barclays made actual representations to its clients about what these terms specifically mean and promised certain results (i.e., specifically prohibiting
. One wonders that, if not for the existence of HFT in the Dark Pool, whether these investors could possibly have processed their desired order volume in the Dark Pool, or without HFT, would the resulting diminished liquidity of the Dark Pool necessarily have required the investors to execute in other venues, where they might have ended up trading with those same HFT counterparties anyway. This, of course, is a question of fact that cannot be resolved on a motion to dismiss. It is, however, a broader conceptual question to keep in mind when considering who was harmed by the alleged wrongdoing in this case and whether proximately caused damages were suffered. It also should be noted that, while not preclusive of this case, investors in the Dark Pool have commenced class action litigation against Barclays. (See In re: Barclays Liquidity Cross & High. Frequency Trading Litig., 67 F Supp 3d 1375,