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Swimming in dark pools, Part 2: Investors can get fleeced

Being invisible is what a so-called "dark pool" is all about. If you think you're swimming in that pool unbeknownst to predators and are actually visible, though, you could be in a world of hurt.

In the world of securities and investments, that universe of pain is going to be directed primarily at innocent investors who, frankly, don't know what kind of water they are treading.

We referenced dark pools in our immediately preceding blog post, noting in our February 3 entry that this "stock market within the stock market" is a vehicle through which large-scale investors -- read banks and mutual funds, for example -- can quietly trade huge amounts of securities they hold for customers in a stealth-like manner. That is a perceived advantage, since the secrecy provided for by dark pools keeps at a distance other "predatory investors" who might otherwise quickly jump in to score quick transactional gains and, in the process, manipulate stock prices to the detriment of those customers.

Here's a problem, though: Dark pools aren’t always, well, dark.

In fact, flawed dark pool investing programs set up by institutional investors can end up being quite transparent to competitors.

Securities regulators found that to be the case with dark pools invested in by Barclays and Credit Suisse, respectively. As noted in a recent Reuters article, those banks settled federal and state charges late last month alleging that investors in those entities were essentially defrauded by statements telling them that their securities invested through dark pools "would be protected from predatory high-frequency trading tactics."

They weren't.

As a result, the two banks will now cough up $154.3 million in fines and disgorgement penalties. The outcome, says a state attorney general involved in the matters, spells "the first major victory in the fight against fraud in pool trading."

In the constantly evolving and ever-sophisticated world of securities investments, new fraud vehicles emerge with regularity. An investor with questions or concerns regarding questionable broker or adviser conduct can obtain guidance and diligent legal representation from a proven securities law attorney.

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