Chairs_99804207A high-profile class action against Barclays over so-called high-frequency trading is heading into a key phase this month, with the court set to decide plaintiffs’ motion for class certification—a pivotal moment in the case’s trajectory.

Strougo v. Barclays Plc, 14-cv-05797 (S.D.N.Y.) began in July 2014, when a Barclays purchaser of Barclays American Depositary Shares (“ADSs”) filed a putative class action against the bank for violating the federal securities laws, alleging the bank made false or misleading statements about its operation of so-called dark pools that artificially inflated the ADSs’ price. Dark pools are alternative trading venues where institutions trade massive quantities of securities anonymously, without revealing the quantity or price to the general public until the trade is complete. Dark pools tend to be fresh feeding grounds for high-frequency traders (“HFTs”), who utilize complex computer algorithms to move in and out of securities positions within fractions of a second. By employing their computer technology to gain access to information about trades occurring in dark pools before other investors do, HFTs have a key informational advantage which they can use to their benefit.

The Strougo plaintiffs alleged Barclays operated its dark pool—known as “Liquidity Cross,” or “LX”—in a way that favored predatory high-frequency trading, while falsely overstating the safety and transparency of the LX trading environment. The plaintiffs said Barclays enticed HFTs into LX by offering them reduced fees and allowing them to place their computer servers close to Barclays’ own systems in order to give HFTs a sneak preview of key trading data, all while consciously concealing these facts from the investing public. Because of these misrepresentations, Barclays ADSs allegedly traded at an artificially inflated price—until the New York attorney general (“NYAG”) filed a complaint in 2014 detailing Barclays’ alleged fraud, precipitating a massive ADS price decline.

The plaintiffs mostly survived Barclay’s dismissal bid in April 2015, with New York District Judge Scheindlin holding that certain misstatements alleged in the complaint may have been material to investors (even if not material to Barclays)—a key element of the securities fraud cause of action. The plaintiffs then moved for class certification in July 2015, asking the judge to certify a class consisting of all persons who bought ADSs between August 2, 2011, and June 25, 2014.

Describing the case as a “textbook example of a case warranting class action treatment,” the plaintiffs argued there was significant “commonality” of legal and factual issues, and that these issues “predominated” over individualized ones sufficient to warrant class action treatment. See Fed. R. Civ. P. 23(a)-(b). In a federal securities fraud case, a plaintiff must prove that the defendant’s intentional or reckless misrepresentation (or omission) about a “material” fact impacted the security’s price, and that the plaintiff “relied” on the misrepresentation when buying or selling the security and sustaining losses. When lodged as a class action, a key question is whether plaintiffs can prove that they relied on the defendants’ alleged misstatements in a manner common to the class.

Recall that the Supreme Court in Basic Inc. v. Levinson, 485 U.S. 224 (1988) announced a presumption that all class members relied on alleged misstatements when purchasing or selling securities, where the misrepresentations were public and material, and where the market was efficient. To determine market efficiency, courts look to a set of factors enunciated in Cammer v. Bloom, 711 F. Supp. 1264, 1286-87 (D.N.J. 1989), which drive a central question: does the market in which the securities traded permit material information to be quickly and accurately assimilated into the security’s price? Also, the Basic presumption is rebuttable: any evidence that “severs the link” between the alleged misstatements and the security’s price will shift the burden back to plaintiffs to show reliance on an individual basis, defeating certification.

As is so often the case since Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014), the parties filed competing experts’ reports on whether Barclays’ alleged misstatements about the LX trading environment impacted ADSs’ price. Interestingly, both parties agreed that none of Barclays’ alleged misstatements actually caused any increase in ADSs’ price. The plaintiffs theorized, however, that the misstatements’ impact was simply to “maintain” ADSs at an artificially inflated price that reflected investors’ overconfidence in Barclays’ integrity. Whether this “maintenance” theory is compatible with price impact seems to be murky territory. Defendants have argued that if the misstatements did not cause a price movement, then price impact is lacking as a matter of law. But a recent case, Carpenters Pension Trust Fund of St. Louis v. Barclays PLC, No. 12-CV-5329 SAS, 2015 WL 5000849, at *9 (S.D.N.Y. Aug. 20, 2015), indicates that price maintenance and price impact are compatible under certain circumstances.

Barclays also contended that the alleged misstatements’ lack of price impact showed that the ADS market was not efficient. A “cause and effect” relationship between the misstatements and price is actually the fifth Cammer factor, and Barclays argued that it should be necessary for market efficiency rather than simply one of several factors to be balanced. But the plaintiffs’ expert looked at 38 instances in which “unexpected news” about Barclays entered the public sphere, and concluded that in all instances the market for ADSs efficiently incorporated that information into the security’s price. The Carpenters case, moreover (which also involved Barclays ADSs), found that the market was efficient even though a cause-and-effect relationship between the misstatements and ADS price was lacking.

Finally, Barclays contended that plaintiffs had proposed only a “vague, general economic framework” for calculating damages on a classwide basis, falling short of the standard set forth in Comcast Corp. v. Behrend, 133 S.Ct. 1426 (2013). Plaintiffs’ proposal was simply to compare the price drop following the NYAG’s complaint with the artificially inflated price, which Barclays criticized as “simplistic” and unable to account for the case’s myriad “complexities.”

It will be interesting to see whether Judge Scheindlin finds that the plaintiffs’ “price maintenance” theory is consistent with price impact, and how much weight she places on the fifth Cammer factor in determining market efficiency. A hearing on the motion is scheduled for November 5, 2015, so stay tuned. If the parties do not settle, we could see a decision within the next few months.