Allegations hinder Barclays CEO
Civil complaint says the bank lied to customers and masked the role of high-frequency traders, write Elisa Martinuzzi and Richard Partington
ANTONY Jenkins, promoted to run Barclays after the Libor scandal, has pledged to overhaul the bank’s culture but allegations of fraud on his watch are undermining his plan.
ANTONY Jenkins, promoted to run Barclays after the London interbank offered rate (Libor) scandal, pledged to overhaul the bank’s culture, committing to values of integrity and respect. However, allegations of fraud on his watch are undermining his plan.
Barclays lied to customers and masked the role of high-frequency traders as it sought to boost revenue at one of Wall Street’s largest private trading venues, New York Attorney-General Eric Schneiderman said in a civil complaint filed last Wednesday. He cited a pattern of misleading and false representations that went on as recently as April.
The first claims of new misconduct since Mr Jenkins was named CEO of the London-based bank in August 2012, mark a setback in his efforts to break with the past and have sent shares plunging the most since he took over. A hit to the reputation of the Barclays LX dark pool would hinder Mr Jenkins’s effort to turn around the firm’s investment bank by focusing on equities.
“He’s lost some credibility,” said the founder and CEO of SVM Asset Management in Edinburgh, Colin McLean, which holds Barclays shares. “He hasn’t achieved the cultural change he’s talked about. A lot of activities will come under scrutiny.”
Mr Jenkins said in a memo to staff on Thursday that the lawsuit represents “serious charges that allege a grave failure to live up to our values and to the culture at Barclays which we are trying to create”.
“I will not tolerate any circumstances in which our clients are lied to or misled, and any instances I discover will be dealt with severely,” the CEO said.
Mark Lane, a spokesman for Barclays, said the bank is cooperating with Mr Schneiderman’s office and is examining the matter internally.
Mr Jenkins vowed to change the culture of a bank that paid a record £290m fine in 2012 after admitting it submitted false London interbank offered rates, and $44m to settle claims that a trader tried to manipulate the price of gold the day after the Libor settlement.
Barclays has set aside more than £1.6bn to compensate customers sold insurance they did not need or interest-rate swaps that lost them money.
Probes into private-trading venues known as dark pools and banks’ relationships with highfrequency trading firms could lead to $163m in penalties and legal costs for Barclays, Credit Suisse analysts estimated in a note to clients on June 4, before Mr Schneiderman’s lawsuit.
“Despite the fact this was a small part of the business, any fine could be grossed up,” Brewin Dolphin analyst Edmund Salvesen said in London. Barclays shares fell 6.5% on Thursday, the biggest decline since June 2012. They rose 0.5% on Friday to close to 216.05 pence, valuing the bank at £35.5bn.
The “larger issue is the business risk, customer disengagement given that dark-pool trading is only one part of Barclays’s electronic equity offering,” said Jefferies International analysts led by Joseph Dickerson, in a note to clients on Friday.
Equities at Barclays were about 26% of the “core” investment bank’s £8.7bn revenue base last year, they said, adding the suit may prompt calls
These are the first claims of new misconduct since Mr Jenkins was named CEO in August 2012
for senior management exits.
The Barclays LX dark pool, part of the firm’s equities business, handles about 282-million shares weekly, making it the second-largest US dark pool behind only Credit Suisse’s Crossfinder, according to data from the Financial Industry Regulatory Authority. Each day, more than 6-billion shares change hands in the US stock market, according to data compiled by Bloomberg.
Barclays temporarily removed Bill White from his role overseeing electronic equities trading to focus on the bank’s response to the lawsuit, said a person briefed on the matter, who requested anonymity because the decision has not been announced publicly. Mr White is not being suspended, the person said.
Barclays estimated that expanding the trading platform could generate as much as $50m a year, according to Mr Schneiderman’s complaint. Starting in 2011, Barclays hoarded orders for stocks and assured investors they were protected from highfrequency firms, while simultaneously aiding predatory tactics, Mr Schneiderman said.
“It’s yet another problem that was avoidable, and is damaging the reputation of Barclays, the City and the country,” said opposition Labour Party legislator and member of Parliament’s Treasury Committee John Mann.
The investigation may hinder Barclays’s effort to expand in equities as it revamps its investment bank and as income from fixed-income trading declines.
While income at the equities division, which also services hedge funds, fell 5% in the first quarter, it outperformed the larger fixed-income, commodities and currencies arm, whose revenue slid 41%.
“The equities franchise has been tainted,” said Frederic Ponzo, managing partner of GreySpark Partners, a Londonbased consulting firm that audits dark pools for conflicts of interest. “They’re betting the house on equities, and the franchise is not as clean as it ought to be.”
Some money managers and brokers began shunning Barclays’s dark pool after the alle- gations emerged. Voya Financial stopped sending orders to the LX venue, as did Sanford C Bernstein, Deutsche Bank and Royal Bank of Canada, people with knowledge of the matter say.
“Equity execution is not a high-margin business,” Brad Hintz, an analyst at Sanford C Bernstein, said by e-mail. “But it is the core, the bedrock on which all the rest is based.”
If a bank loses trading business, it is unlikely that clients will do derivatives trades with the firm and it may lose share in underwriting stock offerings, said Mr Hintz.
Mr Jenkins “has ultimately got to take responsibility”, analyst at Shore Capital Group Gary Greenwood said in Liverpool. “It’s not like he’s been there a month. These are huge, complex organisations, though, and it’ll take him a long time to get under the skin of all parts of it.”
Mr Jenkins, who studied politics, philosophy and economics at Oxford University, had been CEO of the Barclaycard creditcard unit since 2006 before he was named head of retail banking in November 2009.
In February last year, six months after taking over as CEO, Mr Jenkins said the bank would commit to the five values of respect, integrity, service, excellence and stewardship.
“There will be no going back to the old ways of doing things,” he said at the time. “We get it. We are changing the way we do business, we are changing the type of business we do and we are setting out a new course.”
Mr Jenkins promised to cut costs and jobs to return the lender to profit. He also set out to dial back the investment bank that former CEO Robert Diamond built in a 15-year expansion of Barclays’s fixed-income business, capped by the firm’s 2008 purchase of Lehman Brothers’ North American operations out of bankruptcy.
Mr Diamond left in July 2012, days after the Libor fine, having lost the confidence of the governor of the Bank of England and that of the chairman of the financial regulator.
Mr Jenkins hired Rothschild vice-chairman Anthony Salz to lead a review of Barclays’s culture. In April last year, Mr Salz found the firm paid bonuses “incapable of justification” and said some bankers “seemed to lose a sense of proportion and humility”. Less than a year later, John Sunderland, the then-head of remuneration, said the bank’s lack of “pay competitiveness was beginning to cause demonstrable damage” to its business, especially in the US.
Shareholders were not pleased. Demands for higher pay, especially from former Lehman Brothers investment bankers, and dwindling returns at the securities unit led to investor pressure for a deeper reorganisation.
Last month, after reporting a 49% drop in first-quarter profit, Mr Jenkins announced a retreat from building a global bank and said he would cut a quarter of investment-banking staff. The firm would shrink its fixedincome business amid a structural decline and a “weak” investment-banking revenue outlook.
The focus on its dark pool “highlights another problem area for Barclays,” Mediobanca analyst Christopher Wheeler said. “The salient point is what this means for their equity business, as Barclays seeks to rebuild a smaller investment bank with equities at its core.”
Mr Jenkins is appointing new managers amid a wave of senior departures in what he has described as a “generational shift.” It may take a decade to rebuild trust in the bank after the series of scandals that have tarred its reputation, Mr Jenkins warned in December.
“Barclays is a risk-taking culture that has resulted from years of putting profit before people,” said Mark Williams, author of Uncontrolled Risk, a book on the rise and collapse of Lehman Brothers.
“No one CEO can correct the level of structural and cultural changes that need to occur,” he said.
Some money managers and brokers shunned Barclays’s dark pool following the claims