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Barclays enlists outside help in dark pools probe

By Steve Slater and Sarah N. Lynch

LONDON/WASHINGTON (Reuters) - Barclays Plc has hired lawyers from the high-profile firm Wilmer Cutler Pickering Hale and Dorr LLP to help the bank defend itself against accusations that it deceived investors in its "dark pool" trading venue, according to people familiar with the matter.

Matthew Martens, formerly the chief litigator at the U.S. Securities and Exchange Commission, is among the WilmerHale lawyers working on the case, the sources said.

Martens is known for leading the SEC to victory in its civil fraud trial against Fabrice "Fabulous Fab" Tourre, the former Goldman Sachs vice president who was found liable by a New York jury for misleading investors in a subprime mortgage product that failed during the financial crisis.

Kerrie Cohen, a spokeswoman for the bank, declined to comment.

Martens did not respond to an e-mail seeking comment.

Barclays' shares slid 6.5 percent on Thursday to a 19-month low after New York Attorney General Eric Schneiderman filed a securities fraud lawsuit that takes aim at the British bank's "dark pool" trading venue, known as LX Liquidity Cross.

Dark pools let institutional investors trade large blocks of shares anonymously and only make trading data available afterwards so that investors with large orders are not at a disadvantage.

The news wiped more than 2 billion pounds ($3.4 billion) off of Barclays' market value on Thursday, though the stock closed up 0.5 percent on Friday on the London Stock Exchange. Barclays' New York-listed shares tumbled 7.4 percent on Thursday to close at a 19-month low of $14.55 following news of the lawsuit and then recovered on Friday, ending up 2.1 percent.

The attorney general's lawsuit accuses the Barclays dark pool of giving high-frequency traders an unfair advantage, even though the bank had promised investors they would be protected from "predatory" and "toxic" traders.

The complaint also said the bank broke its promise to get its customers the best prices by executing nearly all of their orders on LX, instead of searching for better deals at rival exchanges and trading platforms.

Barclays' dark pool business originally belonged to Lehman Brothers, the investment bank that collapsed in September 2008. Barclays subsequently bought Lehman's U.S. business.

The 31-page complaint from Schneiderman said internal Barclays documents valued the growth opportunity from pushing more orders into its dark pool at between $37 million and $50 million per year.

Total revenues for the dark pools business may be $100 million to $200 million, industry sources and analysts estimated, out of $4.6 billion in equities revenues last year.

Analysts said the hit to its stock reflects broader concern that customers may leave Barclays and that Chief Executive Officer Antony Jenkins will struggle to turn around the bank's culture as quickly as he needs to, as well as anxiety about the threat of higher-than-expected litigation costs on a range of issues.

"The complaint reminds investors of the litigation burden that faces the sector and Barclays," said Michael Helsby, an analyst at Bank of America Merrill Lynch.

The CEO told Barclays staff in a memo issued on Thursday he had started an internal investigation into the allegations.

"To assist us in that, we have brought in substantial external resource to ensure that the investigation can proceed at pace and is properly objective," Jenkins' memo said.

The memo did not disclose which law firm had been hired.

Barclays has been hit by a series of scandals in recent years, including its role in the rigging of the Libor interest rate, which cost then-CEO Bob Diamond his job in 2012, leading to huge fines and legal bills.

Helsby raised his estimate of possible litigation costs for Barclays to 7.5 billion pounds over the next three years, from 2.4 billion, and cut his price target on the stock to 285p from 350p.

Barclays, which has 20 days to respond to the lawsuit, said on Friday it was still assessing the complaint.

Barclays could incur a litigation cost of $163 million from the dark pool activities, Credit Suisse analysts estimated.

Rival banks have pulled business out of Barclays' dark pool, the Financial Times reported. Deutsche Bank , Credit Suisse and Royal Bank of Canada and asset manager Alliance Bernstein had all withdrawn from the dark pool, it said, citing people familiar with the matter.

Barclays has the second most-active alternative trading system in the United States after Credit Suisse, according to data compiled by the Financial Industry Regulatory Authority, the Wall Street-funded regulator.

They are followed in size by UBS , Bank of America Merrill Lynch , Morgan Stanley , Deutsche Bank and Goldman Sachs .

Shares of other banks also fell after the Barclays lawsuit, on concern that others will also be targeted.

(Additional reporting by Lionel Laurent)

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