July 2011: London Litigation Update

CDO Misselling:

In Cassa di Risparmio della Repubblicca di San Marino SpA (“CRSM”) v. Barclays Bank Ltd (“Barclays”), Case No: 08-757, High Court of Justice, Queen’s Bench Division, the court provided a clear summary of the legal principles that apply in CDO misselling claims, particularly if contractual disclaimer is at issue. Barclays sold CRSM four sets of AAA-rated, credit-linked notes (the “Notes”) in 2004/early 2005 having a total face value of €406 million. The Notes matured in 5 to 7 ½ years. In exchange for the principal value of the Notes, CRSM received a coupon for approximately Euribor + 0.95 %. CRSM’s central claim was that although Barclays had sold it the Notes on the basis of an AAA-rating that Barclays intended it to rely upon, and upon which it did rely, Barclays knew through internal modeling that the Notes had a probability of default equivalent to B-rated instruments. CRSM further alleged that Barclays deliberately structured the Notes to maximize its own profits.

Barclays’s expert witness testified that this practice – known as “credit ratings arbitrage” – was widespread in the structured finance sector during the boom. In many U.S. courts, the claimants have argued successfully that banks engaging in such practices acted fraudulently.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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