Barclays faces new $700m bill By Sam Jones, Hedge Fund Correspondent Barclays faces a demand to pay as much as $700m to a US hedge fund after losing a crucial appeal in a five-year legal battle that revives questions over the bank’s strategy during the financial crisis. In a judgement on Thursday, the New York supreme court of appeals overturned an earlier legal ruling in Barclays’ favour and found the bank liable for breach of contract over a vast credit derivatives transaction with Connecticut-based Black Diamond Capital.
The ruling means Barclays must return just under $300m in withheld collateral to the hedge fund. The bank is also on the hook for a further $300m-$400m in interest charges and legal costs, the Financial Times has learned. There will be another hearing to set the exact level of interest and legal costs owed by Barclays. According to a claim by Black Diamond, a leading credit-focused hedge fund with $11bn in assets under management, the fund’s contractual rights over Barclays entitle it to collect default interest at a rate of 15.6 per cent a year. Barclays disputes both the ruling, and quantum of potential damages. The bank said: “We are disappointed with and disagree with the court’s decision. We are evaluating our options with respect to an appeal.” Even if the bank is denied the right to an appeal, it may still be able to dispute the total level of damages and interest it must pay. Barclays already faces a barrage of legal costs. Last year it became the first to settle with regulators for the manipulation of benchmark Libor interest rates. In September this year, the UK’s Financial Conduct Authority castigated the bank for its “reckless” capital raising deal with Qatar, threatening a £50m fine. This month Californian authorities filed a suit to enforce $470m in penalties relating to the manipulation of US energy prices, which Barclays is contesting. The latest case gives a rare glimpse into the way in which banks such as Barclays became much more aggressive in dealing with clients – and holding on to collateral and cash – in the last quarter of 2008 as they moved to shore up their own balance sheets. Many hedge funds were hit hard as banks’ reined in the amount of financing they provided to them – or else clamped down on assets they held in custody – as part of a scramble for liquidity. Black Diamond sued Barclays in October 2008 after the bank failed to meet a $40m collateral call demanded by the hedge fund as part of a $1.5bn derivative deal the pair had entered into. After the bank paid only $5m of the call, Black Diamond declared Barclays to be in default on the whole transaction and called back all of the collateral remaining with the bank. According to the terms of the deal, as the valuation of the credit portfolio changed, both Black Diamond and Barclays were entitled to claim, or to request back, collateral as part of the deal. Barclays argued that it still had sufficient time to “cure” the default – an argument initially supported by Justice Eileen Bransten of the state supreme court in Manhattan.