In a judgment handed down in the Commercial Court on 9 March 2011, Hamblen J rejected a claim by CRSM, a San Marino savings bank, that AAA rated CDO2s with a face value of €230m were mis-sold by Barclays in 2004/2005.
Hamblen J held that a statement that a CDO2 was AAA rated was “not some general or abstract statement about default probabilities or risk” but instead “The rating was a statement of the rating agencies’ expert opinion. Nothing more, or less, was implied by the rating. A statement that an instrument was so rated … was in turn merely a statement about what the rating agencies’ opinion was“. In the light of that, and generally on the evidence he had heard at trial, the judge decided that Barclays had not made any general or unqualified representation as to the default risk, or its opinion of the default risk, of the instruments it sold.
He also rejected, on the evidence, the thesis advanced by CRSM that there was an inconsistency between Barclays booking substantial “mark to market” profits, calculated from a pricing model that used credit default swap prices (“credit spreads”) as a key input, and the probability of default characteristic of AAA rated instruments derived from historical default data. Implied “probabilities of default” derived from credit spreads did not provide a reliable, quantified measure of the real world probability of default, and were not inconsistent with the ratings methodology. For these reasons and others, he rejected the claims that Barclays had made misrepresentations.
The judge also dismissed CRSM’s allegations of fraud against certain individuals at Barclays, and found that they had reasonable grounds for believing, and believed, what they had said about the CDO2s.
Hamblen J also analysed certain contractual terms that Barclays said defeated any claim (in the absence of fraud), and concluded that a term by which CRSM had warranted “We … understand and accept, the terms, conditions and risks of … purchasing the Notes” prevented CRSM from arguing that it had been misled as to the risks of default of the CDO2s. Had there been a misrepresentation about the default risk, CRSM would have been precluded from claiming on it by a contractual estoppel, applying the principles derived from Peekay v ANZ and Springwell v JP Morgan Chase.
Other claims by CRSM, alleging misrepresentation in connection with a restructuring of the CDO2s in mid-2005, were also dismissed. In relation to damages, the judge concluded that had any claim succeeded he would not have awarded damages on the basis of “mark to market” valuations at the time of the transactions, but on the basis of any actual loss of principal invested ultimately suffered by CRSM.