Cassa Di Risparmio Della Repubblica Di San Marino Spa (Applicant/ Claimant) v Barclays Bank Plc (Respondent/ Defendant)

JurisdictionEngland & Wales
CourtQueen's Bench Division (Commercial Court)
JudgeHamblen J.
Judgment Date09 March 2011
Neutral Citation[2011] EWHC 484 (Comm)
Docket NumberCase No: 2008 Folio 757

[2011] EWHC 484 (Comm)


Before: Mr Justice Hamblen

Case No: 2008 Folio 757

Cassa di Risparmio della Repubblica di San Marino SpA
Barclays Bank Ltd

George Leggatt QC and Andrew Henshaw (instructed by Nabarro) for the Claimant

Andrew Baker QC and Thomas Raphael (instructed by Linklaters) for the Defendant

Hearing dates: 22, 29 November, 1–3, 6–10, 13–17, 20–21 December 2010, 8–9 February 2011

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.


Mr Justice Hamblen:

I. Introduction and Overview


This is a case about the alleged misselling of a complex financial product. It concerns the sale to the Claimant ("CRSM") by the Defendant ("Barclays") in 2004/early 2005 of four sets of structured notes ("the Notes") with a total nominal value of €406 million, and the subsequent restructuring of the Notes in June 2005. CRSM's case was that it was induced to buy the Notes from Barclays, and to agree to the subsequent restructuring, by misrepresentations which in each case were fraudulent, or which in any event Barclays did not believe or have reasonable grounds to believe were true. CRSM claimed damages for deceit, or alternatively under s.2(1) of the Misrepresentation Act ("the Act"), alternatively for breach of an implied term of the contract, amounting on CRSM's most recent calculations to some €92 million.


The Notes constructed by Barclays and sold to CRSM had embedded within them credit derivatives known as collateralised debt obligations (or CDOs) which gave exposure to the credit risk of a pool of "reference assets" through a portfolio credit default swap. In this case the reference assets themselves included further CDOs, each of which was in turn referenced to another pool (or "portfolio") of some 50 credit default swaps – hence the description "CDO squared" or "CDO 2"..


The CDO 2s had terms of 5 to 7 1/2 years. At the start of this period CRSM paid the principal amount of each Note to Barclays, on which CRSM then received a coupon (generally Euribor + 0.95%). It was CRSM's intention to hold the Notes until maturity. In these circumstances the key risk for CRSM was the "credit risk" or risk of default of the CDO 2s– that is, the risk that CRSM would cease to receive the full coupon and would not get back the full principal amount when the Notes matured. That would occur if a sufficient number and combination of "credit events" (e.g. insolvency or default on a debt) occurred in relation to entities named in the portfolios underlying the CDO 2s.


In agreeing to purchase the Notes, CRSM contended that it relied on the credit rating given to the CSO components of the Notes and on representations allegedly made by Barclays as to the credit risk of these instruments.


It was CRSM's case that Barclays sold the Notes on the basis of an agreed "AAA" rating, which they intended CRSM to rely on and knew that it did rely on as indicating a minimal level of risk, when Barclays also knew and intended that the instruments which they had constructed were in fact far riskier than their credit rating indicated. CRSM contended that whereas a 'AAA' rating signifies a default risk over a 5 year period which is close to zero, Barclays' internal Expected Loss ("EL") financial modelling indicated that at their dates of issue the CDO 2s had a probability of default over their lives of around 30% (equivalent to single 'B' or 'junk'). The result was that the value of the investments at inception was allegedly some €50m less than CRSM paid for them.


CRSM's case was that this "alchemy" was achieved by the use of a practice which it described as 'credit ratings arbitrage'. It submitted that the intention and result of this practice was (a) to obscure the actual risk of the instrument and (b) to create an instrument whose actual risk of default was far higher than its AAA rating implied.


CRSM contended that the advantage to Barclays of exposing it to much greater credit risk than CRSM appreciated and the AAA rating implied of the CDO 2s was that it enabled Barclays to book large profits from the transactions – which CRSM estimated (although Barclays denied) were almost equivalent to CRSM's €50m loss on the CDO 2s at the point of sale. This was because the levels of profit for Barclays closely corresponded with what CRSM contended was the levels of risk to which it was exposed by the Notes. CRSM's case is that Barclays constructed and sold to CRSM financial products for which, on their own calculations, a coupon commensurate with the risk would have been around 5% above Euribor, while paying CRSM only the far lower coupon appropriate to a AAA-rated investment, and profited from the difference, and that this was achieved as a result of the misrepresentations relied upon.


There is a second stage to the relevant events. In early 2005 CRSM started to become concerned that some of the companies whose names had been included in the portfolios underlying the CDO 2s were experiencing financial difficulties and that the credit risk of the instruments might therefore be higher than CRSM had previously thought. Barclays responded to CRSM's concerns by recommending to CRSM a restructuring of the CDO 2s. This took the form of substitutions of some of the entities referenced in the portfolios and other structural changes to the CDO 2s, which Barclays allegedly represented would be achieved without profit to Barclays and by reference to stated criteria which conveyed the impression that the restructuring would be beneficial to CRSM in risk terms.


It was CRSM's case that, in fact, the effect of the restructuring was, and was known and intended by Barclays at the time to be, the opposite of what was represented, and that it significantly increased the risk to which CRSM was exposed – thereby reducing the value of CRSM's investments —and enabling Barclays to extract further profits.


Of the three CDO 2s embedded in the Notes, Barclays subsequently agreed to repurchase two from CRSM. The third CDO 2 has now lost its entire value.


Barclays denied liability on all of the claims and strongly rejected any suggestion of fraud or dishonest dealing on its part. It contended that all the claims are unfounded on the facts, for multiple reasons. It further submitted that the claims (other than for fraud) are defeated, as a matter of contract, by the terms of the purchase and restructuring transactions agreed between the parties; that the claims are defeated, because the extensive pre-contract disclaimers remove any factual foundation for the claims; and that there is no basis for the alleged implied term, not least because it is inconsistent with the terms and structure of the contracts.


Barclays submitted that CRSM's "arbitrage" case is built on comparing the incomparable. An AAA credit rating is an expert opinion from a ratings agency that a debt instrument is of highest credit quality involving the lowest expectation of credit default. It is an expert opinion as to the actual prospects of a debt instrument as issued performing in full over time, that is highly relevant for all investors and sufficient for many (for making investment decisions). By contrast internal EL modelling such as that carried out by Barclays is not concerned with risk but rather with deriving a price or value based on credit default swap market spreads to be used by banks to mark their books to market, to assist them in hedging and to calculate notional profit at the time of trading.


Barclays further submitted that it is inherent in putting together a CSO 2 structure, that the inner CSO portfolios will be populated by reference names with high credit spreads relative to the coupon being paid on any AAA-rated CSO 2 tranche. Repackaging portfolios of higher-yielding, lower-rated credits into a lower-yielding, higher-rated structure is the whole purpose of the exercise. Further, the practice of favouring higher-spread names in populating the inner CSO reference portfolios, so long as the CSO 2 tranche still attains any target rating(s), was practised not just by Barclays but by other structurers in the field. It was the basis of the CDO business.

II. The Factual History

(A) The Parties


CRSM is the oldest of the twelve banks established in the Republic of San Marino. It was founded in 1882 and has headquarters and 16 branches in the Republic of San Marino. CRSM engages primarily in private banking, retail banking, sales and trading of securities, and asset management. As of 31 December 2007, it had total assets of €3.7 billion and net income of €7.2 million.


CRSM directly or indirectly controls 14 subsidiaries. At the time the Notes were purchased it had a 70% shareholding in Delta S.p.A., which is the holding company for two Italian consumer finance companies, Carifin S.p.A. ("Carifin") and PlusValore S.p.A. ("PlusValore") (together referred to as "the Delta companies"). Delta itself and the Delta companies are based in Bologna, Italy.


The main people involved in the transactions on CRSM's side were Mr Sandro Sapignoli, Treasurer of CRSM (who left CRSM in September 2004); Mr Wilmo Montanari, CFO and Head of the Uffico Finanziaro(finance department) of CRSM until October 2004 (who left CRSM in October 2004); Mr Maurizio Morolli, Consultant in the Uffico Finanziaro of CRSM from June 1999 to March 2005 and Senior Executive in the Uffico Finanziaro from March 2005 to date, Mr Guiseppe Buoncompagni, Member of the Uffico Finanziaro from March 2005 to December 2005 (who left CRSM February 2009) and Mr Fantini, the CEO of CRSM at the material time. I heard evidence from all of these...

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