Barclays 'hit for up to $250m' in deal to end derivatives case

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The Independent Online

Barclays, Britain's third-largest bank, has agreed to pay up to $250m to the German state bank HSH Nordbank to settle a dispute over the management of controversial credit derivatives.

The two banks had been discussing an out-of-court settlement since the World Economic Forum in Davos at the end of last month, and reached a deal over the weekend, according to sources familiar with the matter.

HSH, the state bank for the city of Hamburg and the state of Schleswig-Holstein in northern Germany, sued Barclays last September for the mis-sale and mismanagement of complex debt instruments, known as collateralised debt obligations. HSH lost an estimated $250m on $571m worth of CDOs which it bought from Barclays Capital, the bank's investment banking arm, in 2001. Barclays had denied the allegations, saying that the fall in the value of the CDOs was largely the result of market conditions.

The court action brought by HSH concerned a $151m investment it made in one CDO marketed by Barclays called Corvus. HSH argued that this CDO had investments in many other Barclays CDOs - for that reason CDOs are known as "Russian dolls." It accused Barclays of dumping credit risks such as exposure to aircraft leases, emerging market debt and telecoms bonds into Corvus three weeks after the 11 September attacks.

The trial was due to begin on 21 February. At a pre-trial hearing last year, the court agreed that Barclays had a wider duty of care to its client and had an obligation to act in good faith as opposed to merely observing the strict terms of the contract.

Barclays took an undisclosed provision to cover the settlement in last year's accounts.

The two banks said in a joint statement yesterday: "The legal proceedings between Barclays Bank and HSH Nordbank have been resolved amicably. We look forward to continuing a normal business relationship."