Cassa Di Risparmio Della Repubblica Di San Marino Spa v Barclays Bank Ltd

Factual and Procedural Background

This case concerns the alleged misselling by the Defendant ("Barclays") to the Plaintiff ("CRSM") of four sets of structured notes ("the Notes") in 2004/early 2005, with a total nominal value of 406 million, and the subsequent restructuring of these Notes in June 2005. CRSM claimed it was induced to purchase the Notes and agree to the restructuring by fraudulent misrepresentations or misrepresentations made without reasonable grounds for belief in their truth. CRSM sought damages for deceit, alternatively under section 2(1) of the Misrepresentation Act 1967, and alternatively for breach of an implied contractual term, with damages claimed amounting to approximately 92 million.

The Notes incorporated complex financial instruments known as collateralised debt obligations squared ("CDO2s"), which exposed CRSM to the credit risk of portfolios of credit default swaps referencing various underlying assets, including asset-backed securities and other CDO tranches. CRSM intended to hold the Notes until maturity, with the primary risk being credit risk, i.e., the risk of default events affecting the underlying reference entities.

CRSM contended that Barclays sold the Notes based on an agreed "AAA" credit rating, which Barclays knew was misleading as the actual risk was significantly higher, supported by Barclays' internal expected loss modelling showing a probability of default around 30%. CRSM alleged Barclays engaged in "credit ratings arbitrage" to obscure the true risk and to generate substantial profits, while CRSM received a coupon rate commensurate with a AAA-rated investment, much lower than appropriate for the actual risk.

In early 2005, CRSM expressed concerns about the credit quality of some reference entities, leading Barclays to propose a restructuring involving substitutions and structural changes represented as beneficial and at "zero cost". CRSM later alleged these representations were false and that the restructuring increased CRSM's risk and Barclays' profits.

Barclays denied all liability, rejected allegations of fraud, and contended that disclaimers and contractual terms precluded CRSM's non-fraud claims. Barclays further argued that internal expected loss modelling was not a reliable measure of real-world default risk, that credit ratings were expert opinions distinct from pricing models, and that the alleged arbitrage and profits were consistent with market practice.

The case involved extensive factual and expert evidence concerning the nature of the Notes, credit default swaps, CDO and CDO squared structures, credit ratings, and the parties' communications and contracts. CRSM also claimed an implied contractual term that Barclays would not structure the Notes with a materially different risk of default from that indicated by the AAA rating.

Legal Issues Presented

1. Whether Barclays made fraudulent or negligent misrepresentations inducing CRSM to purchase the Notes and agree to the restructuring.
2. Whether the alleged representations were false or misleading, particularly regarding the risk of default and the nature of the restructuring.
3. Whether CRSM relied on the alleged representations in entering into the contracts.
4. Whether contractual terms precluded CRSM's claims of misrepresentation under section 2(1) of the Misrepresentation Act 1967.
5. Whether an implied term existed that Barclays would not structure the Notes with a materially different default risk than indicated by the AAA rating.
6. The appropriate measure and quantum of damages if CRSM's claims succeeded.

Arguments of the Parties

Plaintiff's Arguments

• Barclays misrepresented that the Notes were safe investments with a very low risk of default, relying on the AAA rating and supporting documents.
• Barclays engaged in credit ratings arbitrage by selecting reference entities with high credit spreads for their ratings, increasing CRSM's risk while maintaining an AAA rating.
• The restructuring was falsely represented as beneficial and at zero cost, while Barclays intended and expected to profit from it.
• CRSM relied on Barclays' representations and was induced to enter into the purchase and restructuring contracts.
• Contractual disclaimers and clauses do not preclude claims in deceit or under section 2(1) of the Misrepresentation Act.
• It was an implied term of the contracts that Barclays would not structure the Notes so that their risk materially differed from that indicated by the AAA rating.
• Damages should be assessed on a reliance basis, including losses on resale and lost return on investment.

Defendant's Arguments

• Barclays denied all allegations of fraud and misrepresentation.
• The AAA rating was an expert opinion distinct from internal pricing models, which were not reliable measures of real-world default risk.
• The pricing model used credit spreads for hedging and valuation purposes, not to estimate default probabilities.
• Credit ratings arbitrage was a normal and accepted market practice and did not imply higher real-world default risk inconsistent with the AAA rating.
• The disclaimers and contractual terms, including non-reliance, assessment and understanding, and terms and conditions clauses, preclude CRSM’s claims under the Misrepresentation Act except for fraud.
• The alleged representations were statements of opinion or expectation, made on reasonable grounds.
• CRSM was capable of assessing and understanding the risks and assumed them; it cannot claim to have relied on misrepresentations.
• CRSM's damages claims are inappropriate in part because CRSM was not locked into the investments and could have mitigated losses.
• The implied term claim is unsustainable as it is not necessary for business efficacy, is uncertain, and contradicts express contractual terms and market practice.

Table of Precedents Cited

Court's Reasoning and Analysis

The court undertook a detailed factual and expert analysis of the nature of the Notes, credit default swaps, CDO structures, credit ratings, and the parties' communications and contracts. It found that the Notes were complex financial products incorporating synthetic CDO squared structures, with CRSM intending to hold the Notes until maturity and relying principally on the AAA rating as an indicator of low default risk.

The court accepted Barclays' explanation that the internal expected loss (EL) figures derived from pricing models using credit spreads did not provide a reliable measure of real-world default probability, and that the AAA rating was an expert opinion based on historical default data, which was the more reliable measure for rating purposes. The court found that Barclays' use of high spread names within rating categories ("credit ratings arbitrage") was a known and accepted market practice, intended to generate profits without necessarily increasing real-world default risk inconsistent with the AAA rating.

The court found that the alleged Purchase Representations (that the Notes had and were believed to have a very low risk of default) were not in fact made as representations of fact by Barclays or its representatives. References to the AAA rating and scenario analyses were descriptions of the Notes' characteristics and expert opinions, accompanied by disclaimers emphasizing that CRSM was responsible for its own risk assessment. Oral evidence from key CRSM witnesses indicated reliance on the AAA rating itself rather than on representations by Barclays.

Regarding the Restructuring Representations, the court found no representation was made that Barclays would not profit from the restructuring; the phrase "cost zero" was understood to mean no cash payment required by CRSM, not that Barclays would forgo profit. The court accepted that Barclays' communications about selection criteria and the Scaramanga model were accurate as to the objective criteria used, and that any limitations of the model were disclosed or known. There was no evidence of deception or dishonesty by Barclays' structurers or salespersons in relation to these matters.

The court rejected CRSM's claims of fraud against the key Barclays individuals, finding their evidence credible that they did not intend to mislead and believed the statements made were true and reasonable. The court also found that CRSM had not proven reliance on any misrepresentations distinct from the AAA rating and disclaimers, and that key decision-makers at CRSM either relied on the rating or on internal analysis rather than on Barclays' statements.

Contractual clauses including non-reliance, assessment and understanding, and terms and conditions were held to preclude CRSM's claims under section 2(1) of the Misrepresentation Act 1967, absent fraud. The court applied principles from Peekay and Springwell to find that CRSM was contractually estopped from claiming reliance on representations about risks when it had contractually acknowledged understanding and acceptance of those risks.

The implied term claim was rejected as not necessary for business efficacy, uncertain in meaning, inconsistent with express terms, and contrary to established market practice of credit ratings arbitrage.

On damages, the court found that date of transaction valuation was inappropriate given CRSM's intention to hold the Notes and the lack of a ready market. Damages should reflect resale values where applicable and actual losses sustained. CRSM was found to have been "locked in" to the investments to a significant extent, with no unreasonable failure to mitigate losses. However, as the claims failed on liability, damages were not awarded.

Holding and Implications

The court DISMISSED all claims brought by CRSM against Barclays.

The court held that CRSM failed to prove that Barclays made actionable misrepresentations, whether fraudulent or negligent, inducing CRSM to purchase the Notes or agree to the restructuring. The alleged representations were either not made, were statements of opinion made on reasonable grounds, or were precluded by contractual disclaimers and estoppels. The implied term claim also failed.

The decision results in no liability for Barclays and no damages awarded to CRSM. No new legal precedent was established; the ruling applies established principles of misrepresentation, contractual estoppel, and the interpretation of complex financial product transactions.