Barclays fails to end U.S. 'dark pool' class action

By Jonathan Stempel

NEW YORK, Nov 6 (Reuters) - Barclays Plc (LSE: BARC.L - news) has failed to persuade a U.S. appeals court to unwind a class action lawsuit accusing the British bank of defrauding shareholders about its private "dark pool" trading platforms.

Monday's decision by the 2nd U.S. Circuit Court of Appeals in New York lets investors in Barclays' American depository shares sue as a group despite a legal error by the judge who certified the class action. The appeals court called that error "harmless."

Class actions can allow plaintiffs to recover more money than if forced to sue individually.

Jeremy Lieberman, a lawyer for the Barclays plaintiffs, said the 3-0 decision reflects the "common sense" idea that investors in widely traded securities be allowed to sue collectively.

Barclays spokeswoman Kerrie Cohen declined to comment. The defendants also include former Chief Executives Robert Diamond and Antony Jenkins, and William White, former head of equities electronic trading at Barclays Capital.

Dark pools were designed to let people quietly trade shares before investors in the broader market could bet against them.

The Barclays investors accused the bank of misleading them about its business and culture by touting its Liquidity Cross, or LX, dark pool as a safe venue, when it actually gave high-frequency traders an unfair advantage.

They said the truth came out when New York Attorney General Eric Schneiderman sued the bank on June 25, 2014, causing its share price to fall 7.4 percent the next day.

In January 2016, Barclays admitted wrongdoing and agreed to pay $70 million to settle dark pool claims by Schneiderman and the U.S. Securities and Exchange Commission.

Writing for the appeals court, Circuit Judge Christopher Droney said a class action was proper because the Barclays (Swiss: BARC.SW - news) investors "directly linked" their damages to the stock price decline resulting from Schneiderman's lawsuit.

"Investors were concerned with lack of management honesty and control" because such problems "could result in considerable costs," he wrote. "Thus, the regulatory action and any ensuing fines were a part of the alleged harm the plaintiffs suffered."

Droney agreed with Barclays that U.S. District Judge Shira Scheindlin, who granted class-action status in February 2016, misapplied a U.S. Supreme Court precedent addressing investors' reliance on information a defendant failed to disclose.

But he said the error was harmless because Scheindlin could presume reliance on Barclays' alleged misstatements under a different Supreme Court precedent.

Scheindlin left the bench last year for private practice.

The case is Waggoner et al v Barclays Plc et al, 2nd U.S. Circuit Court of Appeals, No. 16-1912. (Reporting by Jonathan Stempel and Dena Aubin in New York; Editing by Lisa Von Ahn)