Investors thought they were diving into "safe waters" when using the so-called dark pool at Barclays, but those waters were "full of predators," New York Attorney General Eric Schneiderman told CNBC on Thursday.
"Dark pools theoretically are places where large investors will go to protect themselves from high-frequency traders because there's less disclosure," he said. "A lot of these are big funds that are, in fact, trading for average people on the street. They're trading for pension funds."
Schneiderman announced Wednesday a lawsuit against Barclays—accusing the British bank of in the U.S. to high-frequency trading clients, even as it claimed to be protecting large investors from such traders.
"This is supposedly a way that high-frequency traders can't tell what you're doing," he said. "We found in this case that in fact Barclays [was] providing huge informational advantages to high-frequency traders and deceiving ordinary investors about how safe the pool was."
The suit alleges specific instances of outright fraud by the Barclays Equities Electronic Trading Division, which operated a so-called dark pool alternative trading system.
"They had this very elaborate presentation to investors about how safe their dark pool was … to protect their investors from what they called 'toxic, predatory, aggressive traders,' meaning high-frequency traders," Schneiderman said. "In fact, the whole system was a sham."
Barclays said it's taking these allegations "very seriously," while cooperating with authorities and looking at the matter internally.
The suit delivers another blow to CEO Antony Jenkins, who is trying to restore the bank's reputation after a series of scandals, including the alleged manipulation of Libor benchmark interest rates.
The investigation has been progressing for up to a year but took on additional urgency in recent months, after best-selling author Michael Lewis released the book "Flash Boys," which said markets were rigged in favor of high-speed traders.
"We alleged in the complaint that Barclays invited the predators [traders] in," Schneiderman said. "They gave information advantage. They charged them less per trade."
Barclays did so to increase the trading volume in its pool, he said. "They wanted their pool to make money, but also there's a certain amount of prestige to be the largest in the United States."
He said he has all the documents "showing that was what they were pushing for." Barclays called the dark pool inside the company, "The Franchise," he added.
—By CNBC's Matthew J. Belvedere. Reuters contributed to this report.