Jim Armitage: Barclays and Montreal pension-fund fiasco

Outlook While Barclays has been grafting away with the regulators to keep down the cost of its various punishments, I hear it has just quietly paid $500m (£316m) to Canadian investors after a judge declared it behaved negligently and fraudulently over a complex financial bet it created, which exploded during the financial crisis.

The bank has been fighting for years to avoid paying up in the tangled case of Barclays Bank vs Devonshire Trust.

At one stage in the hearings, Judge Newbould described how he had “considerable doubt” as to the reliability of testimony from Barclays’ former senior executive Jerry del Missier. A final hearing at the end of August has paved the way for the bank to pay up for the losses a judge deemed its actions had caused.

At issue was the way Barclays ended a complex derivatives transaction aimed at providing Montreal council workers’ pension fund with low-risk exposure to the fashionable derivatives known as asset backed commercial paper (ABCPs).

A company called Devonshire was established to create two ABCP investments with Barclays in 2006, with a view to creating many more in the future. Devonshire paid Barclays $600m for them.

However, the financial crisis quickly pushed the venture into meltdown: Canada’s ABCP market froze up as investors, stung by the subprime mortgage fiasco in the US, lost faith in the value of the underlying assets behind them.

As part of the deal, Barclays had agreed that in the event of such a “market disruption”, it would pump money into Devonshire to keep repaying the ABCP loans. Devonshire had been paying Barclays an insurance premium for this service.

However, when the meltdown happened, Barclays refused the emergency cash infusions, pushing Devonshire into default.

The two sides ended up suing each other, with Devonshire claiming Barclays went behind its back to negotiate directly with the Montreal pension fund, in a move that it knew would not succeed. Its gameplan all along was to try its luck against Devonshire in court.

While those doomed negotiations were going on, however, Barclays assured Devonshire they were proceeding well, so Devonshire continued to agree to repeated extensions of a standstill agreement.

The judge said those assurances from Barclays were “misrepresentation” and “not only negligent, but fraudulent”, claims Barclays has always disputed.

Meanwhile, the judge had little time for Barclays’ claim that it had lost $1.2bn in the trades, saying that the actual loss was just $12,000.

The case was one of many around the world in the small print of Barclays’ annual report and accounts.

Toronto lawyer Tom Curry of Lenczner Slaght Royce Smith Griffin, who fought the case for Devonshire says: “This trial illustrates that no amount of complex planning by a large financial institution can overcome basic legal standards for commercial conduct and good faith.”

Its defeat is made all the more telling by the fact that other banks who had created ABCP deals agreed to a mass arbitration deal known as the Montreal Accord when the market froze. But Barclays refused to sign up, preferring to try its luck alone.

Sounds a little like its strategy over the forex scandal, no?