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* NY lawsuit alleges Barclays equities dark pool deceivedsome customers
* Barclays is conducting its own investigation into theallegations
* Barclays boss has vowed to close areas where misconduct isfound
* The equities business is an area he had planned to keep
By Steve Slater
LONDON, July 13 (Reuters) - Barclays boss AntonyJenkins faces one of the biggest tests of his leadership thismonth when he decides whether the bank, Britain's third largest,should fight accusations it deceived and defrauded customers inthe United States.
If Jenkins accepts the allegations, made in a lawsuit filedby New York's Attorney General, he will face a dilemma arisingfrom his pledge to jettison any business that does not fit intothe bank's new, squeaky-clean image.
But the U.S. trading desk at the centre of the allegationsis part of Barclays' equities business, an area it had plannedto keep largely intact while shrinking its investment bank.
It comes at a time of mounting discontent among investors.Some say that after almost two years in the CEO hotseat Jenkinsis failing to turn around both culture and performance.
Barclays' shares are down around 9 percent, close totwo-year lows, since the lawsuit was filed, compared with a 3.5percent fall in European bank stocks in the same period.They have also underperformed their European peers since Jenkinswas appointed in 2012.
"We are concerned about some of the revenue and cost trendsand the pace of management implementation," said Colin McLean,managing director of SVM Asset Management, which owns Barclaysstock. "There's a gap between the promises and the actualdelivery, particularly on costs and bonuses," he said.
RISKY BUSINESS
Fighting the allegations from the New York attorney generalwould be a high-risk gamble, as other banks have found when theyhave taken on the authorities. If the allegations are proven tobe even partially true, Jenkins's credibility as the man to leadBarclays out of its scandal-scarred past would be in tatters.
Investment banks' in-house platforms for buying and sellingshares, known as dark pools, are under investigation byauthorities in the United States and Europe amid allegationsthey have been used to rip off some investors.
New York Attorney General Eric Schneiderman said in hislawsuit he had evidence that Barclays staff falsified marketingmaterial and misled big institutional clients in an effort togrow its dark pool to increase revenues and bonuses.
He said that occurred from 2011 to as recently as April,some 20 months after Jenkins took the helm, unlike other conductissues the bank has faced, which occurred before he became CEO.
Barclays has hired external lawyers to help it investigatethe allegations, including Matthew Martens, formerly the chieflitigator at the U.S. Securities and Exchange Commission. The bank has until around July 25 to decidewhether or not to fight the charges.
Dark pools let institutional investors trade sharesanonymously and only make trading data available afterwards,reducing the chance of information leaking about their tradeorders.
Trading at the venues, rather than on formal stockexchanges, has swelled since 2007, and it is estimated that morethan 40 percent of all U.S. equities trades are executed in oneof the several dozen dark pools in operation.
Barclays' dark pool, known as LX, is the second most activealternative trading system in the United States after CreditSuisse's, according to regulatory data. Other bankswith big dark pools include UBS , Bank ofAmerica, Morgan Stanley, Deutsche Bank and Goldman Sachs.
LIQUIDITY PROFILING
Potentially most damaging in Schneiderman's complaint isthat Barclays lied to core institutional clients, such aspension funds and insurance companies.
U.S. asset manager Alliance Bernstein said it suspendedactivity with the LX dark pool after the lawsuit was filed, andmore clients have pulled out, industry sources said.
Barclays has said it is conducting a full internalinvestigation into the allegations and had brought in outsidehelp, but declined further comment.
Barclays grew its dark pool business aggressively from 2011,helped by a service called 'Liquidity Profiling'.
Liquidity profiling allowed Barclays to group its clients inthe dark pool depending on their trading behaviour, ranging fromsafe and passive trading long-term investors to aggressivehigh-frequency traders trying to exploit tiny price changes.
Some high-frequency traders try to get an edge from speedand technology to detect large orders coming in and tradingahead of them. As a result, the big institutional investorsoften want to avoid trading with them and Barclays' liquidityprofiling offered them that option.
But Schneiderman said Barclays did not exclude theaggressive traders from the pool, despite telling clients itwould. It also excluded information about some high-frequencytrading firms using LX in its marketing material and gavesensitive information to major high-frequency trading firms toincrease their activity, Schneiderman said in his complaint.
"SAINT ANTONY"
Barclays LX had its origins at Lehman Brothers, theinvestment bank that collapsed in September 2008. Barclays'purchase of Lehman's U.S. arm was its platform to build anequities business, led by many former Lehman employees,including Bill White, its head of electronic equities trading.
White has been taken off his day-to-day role and is helpingwith the bank's internal investigation, people familiar with thematter said. White declined to comment via a Barclays spokesman.
Jenkins, a retail banker, was propelled to CEO in August2012 with a pledge to overhaul the hard-charging investmentbanking culture that had dominated Barclays under hispredecessor Bob Diamond, after an interest rate rigging scandalcost the bank $450 million.
Barclays, like many banks, faces other regulatory probesinto past wrongdoing, with an investigation into foreignexchange trading potentially most damaging. Michael Helsby,analyst at Bank of America, estimates Barclays faces possiblelitigation costs of 7.5 billion pounds in the next three years.
There are also concerns around the bank's operatingperformance, analysts and investors said.
When Jenkins presented his first strategic plan in February2013 he estimated income from the investment bank would holdsteady at about 12 billion pounds by 2015, but analysts nowforecast it will be less than 7 billion.
Equities brought in 2.7 billion pounds in revenues lastyear, up by almost a third from 2010 and lifting its share ofthe investment bank revenue to 25 percent from 15 percent.
The electronic equities business was likely to have broughtin about $180-200 million a year, and had about 80-100 staff,mostly in the United States, one of the former staff said.Schneiderman's complaint cited internal Barclays documentsvaluing the growth opportunity from pushing more orders into LXat between $37 million and $50 million per year.
The problem for Jenkins, given his pledge to cast off areaswhere conduct falls short, is that shutting electronic equitieswould be near impossible without damaging the rest of theequities operation, which is a low-margin business based on hugeorder flow, industry sources said.
Attempts to downsize it could also exacerbate tensionsbetween former Lehman Brothers staff who dominate Barclays'investment banking division in New York and their colleagues inLondon, and accelerate an exodus of U.S. investment bankers. (Additional reporting by Lionel Laurent and Nishant Kumar.Editing by Carmel Crimmins and Will Waterman)
