In a judgment [Cassa di Risparmio della Repubblica di San Marino SpA and Barclays Bank Ltd [2011] EWHC 484 (Comm)] handed down on 9 March 2011 by the Commercial Court in London, The Honourable Mr Justice Hamblen dismissed a claim by Cassa di Risparmio della Repubblica di San Marino (“CRSM”) against Barclays Bank PLC in relation to the structuring and sale of various structured products.
The claim related to a series of CDO-squared notes with a combined par value of EUR 230 million which were structured by Barclays and sold to CRSM, a bank, in 2004 and 2005 and to a subsequent restructuring of the transactions. CRSM brought a claim for misrepresentation and, in an amendment shortly before trial, fraud. All of its claims were rejected by the court.
CRSM’s claim was founded on an assertion that Barclays had emphasised the AAA rating awarded to the notes by credit ratings agencies, thereby implying that the notes had a low risk of default, and that its representations were false (which individuals within Barclays knew) because Barclays’ internal estimates of profit and loss figures to be attributed to the deals at inception suggested a materially higher risk of default. The judge held, however, that a statement by the arranging bank about a AAA rating was not a general or abstract statement about risk or probability of default, but only a statement about the rating agency’s opinion. He did not consider, on the basis of the evidence heard, that the representations alleged in relation to default risk were made. Nor did he find any inconsistency between a low probability of default for AAA rated products derived from historic default levels by rating cohort, as used by credit ratings agencies in their credit assessment, and a higher degree of credit risk implied in Barclays’ internal financial modelling of the transactions for hedging and P&L purposes which made use of credit default spreads. Credit spreads were found not to give a reliable indication of “real world” probability of default.
The judge also dismissed the allegations of fraud, finding that the individuals involved at Barclays had reasonable grounds for believing, and believed, what they said about the products.
It was further held that a contractual term in the sales contracts would in any event have precluded the claim, with no finding of fraud. By the term, similar in substance to a provision commonly found in transactions governed by ISDA documentation, CRSM warranted that it understood and accepted the terms, conditions and risk of purchasing the notes and was thus prevented from asserting that it was misled as to the risk of the CDO-squareds. The finding of a contractual estoppel of this nature results from the application of the principles derived from the recent cases in the English High Court Peekay v ANZ and Springwell v JP Morgan Chase. It was also held that another contractual term, similar to “non-reliance” clauses found in ISDA governed transactions, by which CRSM warranted that it was not relying on any communication from Barclays as investment advice or as a recommendation to enter into the transactions, did not mean that CRSM was promising that it was not relying on anything that Barclays said. Whether a statement amounts to advice or a recommendation depended on the substance of the claim made.
CRSM’s claims in relation to the restructuring of the CDO-squareds were also rejected on various grounds.
Linklaters LLP acted for Barclays and instructed Andrew Baker QC and Thomas Raphael.
For further information, please contact:
Patrick Robinson, Partner, (+44) 20 7456 5879 or Alan Walls, Partner (+44) 20 7456 4258
