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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