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UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
In re BARCLAYS BANK PLC SECURITIES
This Document Relates To:
Master File No. 1:09-cv-01989-PAC
DEMAND FOR JURY TRIAL
SECOND CONSOLIDATED AMENDED COMPLAINT
FOR VIOLATION OF THE FEDERAL SECURITIES LAWS
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NATURE OF THE ACTION
This is a securities class action on behalf of all persons who acquired preferred
securities pursuant or traceable to the materially false and misleading Registration Statements and
Prospectuses filed with the United States Securities and Exchange Commission (“SEC”) by Barclays
Bank Plc (“Barclays” or the “Company”) (the “Class”).1 The two Shelf Registration Statements
were filed on September 14, 2005 (“2005 Registration Statement”) and August 31, 2007 (“2007
Registration Statement”) (collectively, the “Registration Statements”);2 the four Supplemental
Prospectuses were filed on April 21, 2006, September 10, 2007, November 30, 2007 and April 8,
2008 (collectively, the “Offering Materials”). All told, from April of 2006 through April of 2008,
Barclays consummated four offerings of the Securities pursuant to the false and misleading
Registration Statements and Prospectuses (the “Offerings”), selling 218 million shares of the
Securities at $25 per share for proceeds of $5.45 billion. This action asserts claims under the
Securities Act of 1933 (“1933 Act”) against Barclays, Barclays Plc, its senior insiders, and the
investment banks that underwrote the Offerings of the Securities (collectively, “defendants”).
Between 2005 and 2008, Barclays significantly increased its exposure to risky credit
market instruments, including:
In compliance with the Second Circuit’s order in this matter, plaintiffs are hereby filing the
Second Consolidated Amended Complaint they originally sought leave to file. Plaintiffs
acknowledge that the Second Circuit affirmed the Court’s order dismissing plaintiffs’ claims for the
Series 2, 3 and 4 Offerings, and plaintiffs are no longer pursing claims regarding those three
The securities at issue (collectively, the “Securities”) are Non-cumulative Callable Dollar
Preference Shares, Series 2, 3, 4 and 5, sold in the form of American Depository Shares (“ADRs “)
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Residential Mortgage-Backed Securities (“RMBS”);
Collateralized Debt Obligations (“CDOs”);
Structural Investment Vehicles (“SIVs” and “SIV-lites”);
Commercial Mortgages and Commercial Mortgage-Backed Securities
Monoline insurers; and
Leveraged finance instruments.
During this period, Barclays and the Individual Defendants caused the Company to acquire tens of
billions of dollars in these highly risky securities and assets, or guarantee such investments by others.
In fact, the Company’s total exposure to these high-risk assets during the relevant period actually
exceeded the Company’s total equity.
Subprime and Alt-A (non-prime) RMBS are securities backed by residential
mortgages extended to borrowers who do not qualify for standard loans. Such loans are inherently
more risky than RMBS backed by conforming loans. The value of Barclays’ subprime and Alt-A
RMBS/CDO portfolios was directly tied to the strength (or weakness) of the U.S. housing market.
When housing prices began to stall and interest rates began to rise in early 2006, homeowners who
overextended themselves and those with poor credit and unstable income began to default on their
loans. Default rates began to rise dramatically throughout 2006 and accelerated into 2007, leading to
a cascading effect on the credit markets due to the correlation of the rising rate of default for
subprime and Alt-A mortgages with the decline in value of the securities backed by these mortgages.
Similar to RMBS, a CDO is a structured finance vehicle holding pools of underlying
cash generating assets and issuing certificates paying a fixed amount of principal and interest. The
securities that were issued in each CDO were divided in “super senior,” “high grade” and
“mezzanine” tranches. “Super senior” tranches are paid first from the cash flow generated by the
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CDO’s underlying assets, with more junior tranches paid only after the more senior obligations had
been satisfied. The assets supporting Barclays’ CDOs of asset-backed securities consisted primarily
of RMBS backed by pools of subprime and Alt-A mortgages, which Barclays referred to as “ABS
CDOs.” The quality and performance of the underlying mortgages in the RMBS was the key factor
in determining the CDO’s performance and value.
Barclays retained “super senior” interests in both “mezzanine” and “high grade”
CDOs. A mezzanine CDO is created by pooling together junior tranches (such as BBB and sub-
BBB rated) of subprime RMBS and other collateral. This asset concentration means that a relatively
small rise in underlying pool losses would simultaneously destroy most of the value of the
mezzanine CDOs and impact the super senior tranches as well.
These and other highly risky investments were material to Barclays’ financial
condition. In fact, Barclays’ credit market exposure equaled more than ?36 billion by the middle of
2007, exceeding the Company’s total equity of ?32.5 billion.3 As the credit markets peaked and then
began their rapid decline, Barclays’ credit market assets also began declining in value, and the risks
of further decline increased exponentially. Yet there was no disclosure to investors.
In an effort to shore up its capital base as the mortgage and credit markets declined,
Barclays issued the preferred securities at issue here. As the mortgage and credit markets
deteriorated further, Barclays continued to issue more and more securities in order to shore up its
depleting capital. But the financial disclosures accompanying these Offerings were both misleading
and incomplete. Indeed, the prospectuses themselves contained virtually no information concerning
For purposes of comparing pounds (“?”) to dollars (“$”) plaintiffs suggest an exchange rate
of 1.99 dollars to the pound, the average from January 1, 2007 to April 8, 2008.
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the financial status of the Company or the risks it faced. Defendants simply “incorporated by
reference” earlier financial disclosures – even though those disclosures were both outdated and
For example, in support of the $1.2 billion Series 3 Offering in September 2007,
defendants included no current financial information for the Company in the Prospectus. Instead,
the Prospectus included such items as a description of the securities, how and when dividends would
be paid, and what would trigger a default in the dividend payment. Then the September 2007
Prospectus simply incorporated by reference the latest financial statements, the most recent of which
was current as of June 30, 2007. And even those financial statements were deficient, as they
included almost no information concerning Barclays’ credit market exposure, and the Company
disclosed no impairments or losses to Barclays’ credit market assets.
As the mortgage and credit market decline intensified, defendants continued to sell
preferred shares to investors who remained uninformed of Barclays’ credit market exposure and
growing losses. In November 30, 2007, defendants completed another offering raising an additional
$1.0 billion in capital. The Series 4 Offering included a Prospectus virtually identical to the
September 2007 Prospectus, and incorporated by reference the very same false and misleading
documents as the Series 3 Offering.
For its final $2.5 billion offering in April 2008 (Series 5), Barclays followed the same
modus operandi as its earlier offerings, issuing a Prospectus that provided little information about the
Company and simply incorporating by reference Barclays’ fiscal year 2007 financial report on Form
20-F. Of course, even this financial data was current only as of year-end 2007. It did not include
writedowns and impairments that would have to be taken due to the freezing of the credit markets
and the collapse of Bear Stearns – all of which occurred in first quarter 2008 and before the Series 5
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Offering. And, like the prior offerings, even as of their effective date the incorporated financial
results failed to properly disclose and account for impairments and writedowns attributed to the
Company’s vast credit market exposure.
Yet at the same time defendants were failing to disclose the substantial risks and
writedowns due to Barclays’ exposure to the credit markets, they were boasting about the
Company’s considerable “risk management” practices and procedures. Indeed, in the 2006 SEC
Form 20-F, defendants dedicated more than 50 pages to describing Barclays’ “Risk Management”
practices. Thus, not only did defendants fail to warn and inform plaintiffs of the true credit market
risks, they simultaneously assured investors that the extensive risk management practices of the
Company helped it avoid such risks altogether.
In fact, by the time of the Series 5 Offering, defendants were aware that their
statements incorporated into the Offering Materials concerning the value of Barclays’ assets, and the
substantial risks that those assets posed in light of their extensive “risk management” assurances,
were false and misleading. The evidence demonstrating that defendants over-valued Barclays’ assets
was objectively verifiable, known to defendants, and directly tied to Barclays’ assets, including:
The ABX and TABX, market indices which Barclays stated it used internally
to value its own assets and which were required to be considered by
applicable accounting rules, had plummeted;
The substantial distress in the credit markets that brought about the collapse
of Bear Stearns, the country’s seventh-largest bank, in March 2008;
The fact that Barclays was actively engaged in mortgage origination and
servicing in the United States (and had been since early 2007), and that most
similar mortgage originators across the country had failed in spectacular
fashion due to the collapsing mortgage, credit and real estate markets;
The dramatic and public downgrades by ratings agencies of most of the
monoline insurers who “insured” more than £20 billion of Barclays’ highest-
risk assets. Barclays had relied on these monoline insurers as a hedge against
loss for those assets. As a result, by the time of the Series 5 Offering most
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market observers expected those monoline insurers to fail, and Barclays’
closest competitors had already written off tens of billions of the same or
similar assets. Meanwhile, Barclays had not even disclosed the risk to its
balance sheet caused by these monoline “hedges”;
In an effort to avoid the collapse of one of the monoline insurers Barclays
initially agreed to provide “backstop” funding to it, but in December 2007 it
was downgraded to junk status. Shortly thereafter, Barclays joined other
large banks working with the New York Insurance Commissioner to protect
their own balance sheets by funding these insurers;
Barclays’ closest competitors had all taken massive writedowns of the same
and similar assets held by Barclays – some exceeding $10 billion – while
Barclays’ writedowns had been unreasonably small;
By the end of 2007, Barclays’ own research analysts were estimating that
even the top classes of CDOs were worth only 20-30 cents on the dollar,
based on current market prices and specifically citing the ABX. Those prices
continued to decline prior to the Series 5 Offering, yet Barclays had valued
its own CDOs (which were of varying quality) at more than 75 cents on the
By defendants’ own acknowledgment in February 2008, these false and
misleading asset values were “run through a challenge process up to and
including Bob [Diamond] and the senior management at Barclays Capital and
there are a series of adjustments that are made reflected in here following that
The writedowns of Barclays’ credit market assets that the Company should have been
taking and disclosing were clearly material. Not long after the April 2008 Series 5 Offering,
Barclays began taking large writedowns and impairments for its toxic assets – just as other banks
had done months and years earlier. In addition, defendants were required to seek huge capital
infusions from third parties, while simultaneously enhancing the Company’s disclosures concerning
the extent of its credit market exposure.
For instance, in June 2008 – less than three months after the Series 5 Offering and in
spite of the fact that defendants had raised more than $5 billion from investors in those Offerings –
Barclays announced it would need to raise an additional ?4.5 billion by issuing shares to foreign
investors in order to “boost its capital held against risky assets.” Then on August 7, 2008, Barclays
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announced its half-yearly results (as of June 30, 2008), and that it had taken a ?2.8 billion writedown
on its credit market assets. But this was not nearly enough, so on October 13, 2008 the Company
announced another private offering, this time raising an additional ?7.5 billion and cutting the
dividend to save an additional ?2 billion.
As a result of defendants’ omissions and false statements in the Offering Materials,
plaintiffs here who bought shares in the four offerings have suffered significant damages. Each of
the securities offerings were sold to investors for $25 per share. On March 4, 2009 – the date of the
first-filed complaint – the Series 2 securities traded at $5.61 per share, the Series 3 traded at $5.90
per share, the Series 4 traded at $6.60 per share, and the Series 5 traded at $6.84 per share. This
JURISDICTION AND VENUE
The claims asserted herein arise under and pursuant to §§11, 12(a)(2) and 15 of the
1933 Act, 15 U.S.C. §§77k, 77l(a)(2) and 77o. In connection with the acts complained of,
defendants, directly or indirectly, used the means and instrumentalities of interstate commerce,
including, but not limited to, the mails, interstate telephone communications and the facilities of the
national securities markets.
This Court has jurisdiction over the subject matter of this action pursuant to 28 U.S.C.
§1331 and §22 of the 1933 Act.
Venue is proper in this District pursuant to 28 U.S.C. §1391(b), because the
Underwriter Defendants (defined below) conduct business in this District and many of the acts and
practices complained of herein occurred in substantial part in this District.
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Lead Plaintiff Marshall Freidus (“Freidus”) acquired the Series 2 Securities in the
Offering and issued pursuant to the false and misleading 2005 Registration Statement and
Prospectuses as set forth in the Certification filed with the Court on May 4, 2009. Freidus was
appointed Lead Plaintiff by Order on December 9, 2009.
Lead Plaintiff Dora L. Mahboubi (“Mahboubi”) acquired the Series 3 Securities in the
Offering and issued pursuant to the false and misleading 2007 Registration Statement and
Prospectuses as set forth in the Certification filed with the Court on May 4, 2009. Mahboubi was
appointed Lead Plaintiff by Order on December 9, 2009.
Lead Plaintiff Stewart Thompson and Sharon Thompson, Trustees for the S.O.
Thompson Rev. Trust and the S.G. Thompson Rev. Trust (collectively, “Thompson”) acquired the
Series 4 Securities issued in the Offering and pursuant to the false and misleading 2007 Registration
Statement and Prospectuses as set forth in the Certification filed with the Court on May 4, 2009.
Thompson was appointed Lead Plaintiff by Order on December 9, 2009.
Plaintiff Dennis Askelson (“Askelson”) acquired the Series 5 Securities on April 9,
2008 in the April 2008 Offering and pursuant to the false and misleading 2007 Registration
Statement and Prospectuses as set forth in the Certification attached hereto.
Plaintiff Alfred Fait (“Fait”) acquired the Series 5 Securities on April 8, 2008 in the
April 2008 Offering and pursuant to the false and misleading 2007 Registration Statement and
Prospectuses as set forth in the Certification filed with the Court on April 20, 2009.
The plaintiffs referenced above in ¶¶19-23 are referred to herein as “plaintiffs.”
Defendant Barclays is a major global financial services provider operating in Europe,
North America, the Middle East, Latin America, Australia, Asia and Africa. Barclays’ U.S.
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operations are headquartered in New York, New York. Barclays Capital (“BarCap”) is the
investment banking division of Barclays. BarCap’s financial results are reported as part of Barclays’
Defendant Barclays Plc is a holding company that is listed in London, New York and
Tokyo and operates through its subsidiary Barclays and acts as the ultimate holding company.
Barclays Plc is located in London, England.
Defendant John Silvester Varley (“Varley”) is, and at all relevant times was, Chief
Executive Officer (“CEO”) and a director of Barclays and Barclays Plc. Varley signed both the
2005 and 2007 false and misleading Registration Statements.
Defendant Robert Edward Diamond, Jr. (“Diamond”) is, and at all relevant times was,
a director and President of Barclays and Barclays Plc. Diamond signed both the 2005 and 2007 false
and misleading Registration Statements.
Defendant Sir Richard Broadbent (“Broadbent”) is, and at all relevant times was, a
director of Barclays and Barclays Plc. Defendant Broadbent signed both the 2005 and 2007 false
and misleading Registration Statements.
Defendant Richard Leigh Clifford (“Clifford”) is, and at all relevant times was, a
director of Barclays and Barclays Plc. Defendant Clifford signed both the 2005 and 2007 false and
misleading Registration Statements.
Defendant Dame Sandra J.N. Dawson (“Dawson”) is, and at all relevant times was, a
director of Barclays and Barclays Plc. Defendant Dawson signed both the 2005 and 2007 false and
misleading Registration Statements.
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Defendant Sir Andrew Likierman (“Likierman”) is, and at all relevant times was, a
director of Barclays and Barclays Plc. Defendant Likierman signed both the 2005 and 2007 false
and misleading Registration Statements.
Defendant Sir Nigel Rudd (“Rudd”) is, and at all relevant times was, a director of
Barclays and Barclays Plc. Defendant Rudd signed both the 2005 and 2007 false and misleading
Defendant Stephen George Russell (“Russell”) is, and at all relevant times was, a
director and Secretary of Barclays and Barclays Plc. Defendant Russell signed both the 2005 and
2007 false and misleading Registration Statements.
Defendant John Michael Sunderland (“Sunderland”) is, and at all relevant times was,
a director of Barclays and Barclays Plc. Defendant Sunderland signed both the 2005 and 2007 false
and misleading Registration Statements.
Defendant Matthew William Barrett (“Barrett”) was Chairman of the Board of
Barclays and Barclays Plc until he resigned from the Company on January 1, 2007. Barrett signed
the false and misleading 2005 Registration Statement.
Defendant Naguib Kheraj (“Kheraj”) was Principal Financial Officer and a director of
Barclays and Barclays Plc until he resigned from the Company on March 31, 2007. Defendant
Kheraj signed the false and misleading 2005 Registration Statement.
Defendant Marcus Agius (“Agius”) is Group Chairman of Barclays and Barclays Plc.
Agius signed the false and misleading 2007 Registration Statement.
Defendant Christopher Lucas (“Lucas”) is a director of Barclays and Barclays Plc.
Lucas signed the false and misleading 2007 Registration Statement.
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Defendant Gary A. Hoffman (“Hoffman”) is a director of Barclays and Barclays Plc.
Hoffman signed the false and misleading 2007 Registration Statement.
Defendant Frederik Seegers (“Seegers”) is a director of Barclays and Barclays Plc.
Seegers signed the false and misleading 2007 Registration Statement.
Defendant David G. Booth (“Booth”) is a director of Barclays and Barclays Plc.
Booth signed the false and misleading 2007 Registration Statement.
Defendant Fulvio Conti (“Conti”) is a director of Barclays and Barclays Plc. Conti
signed the false and misleading 2007 Registration Statement.
Defendant Daniel Cronje (“Cronje”) is a director of Barclays and Barclays Plc.
Cronje signed the false and misleading 2007 Registration Statement.
The defendants referenced above in ¶¶27-44 are referred to herein as the “Individual
Defendant Barclays Capital Securities Limited (“Barclays Securities”) is the
investment banking division of BarCap. Barclays Securities was an underwriter of the Offerings.
Defendant Citigroup Global Markets Inc. (“Citigroup”) is a large integrated financial
services institution that through subsidiaries and divisions provides commercial and investment
banking services, commercial loans to corporate entities, and acts as underwriter in the sale of
corporate securities. Citigroup was an underwriter of the Offerings.
Defendant Wachovia Capital Markets, LLC (“Wachovia Capital”) is the corporate
and investment banking side of brokerage firm Wachovia Securities (both companies are
subsidiaries of banking giant Wachovia). Wachovia Capital provides financial and corporate
advisory services, private capital, debt private placement, mergers and acquisitions advice,
underwriting and equity investing. It also offers real estate financing, risk management services, and
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structured products such as asset-backed and mortgage-backed securities. Wachovia Capital was an
underwriter of the Offerings.
Defendant Morgan Stanley & Co. Incorporated (“Morgan Stanley”) is a global
financial services firm that, through its subsidiaries and affiliates, provides its products and services
to customers, including corporations, governments, financial institutions and individuals. Morgan
Stanley assists public and private corporations in raising funds in the capital markets (both equity
and debt), as well as in providing strategic advisory services for mergers, acquisitions and other
types of financial transactions. Morgan Stanley was an underwriter of the Offerings.
Defendant UBS Securities LLC (“UBS”) is the U.S. investment banking and
securities arm of UBS Investment Bank. UBS Investment Bank provides a range of financial
products and services worldwide. UBS was an underwriter of the Offerings.
Defendant Banc of America Securities LLC (“Banc of America”) is the investment
banking arm of Bank of America. Banc of America offers trading and brokerage services, debt and
securities underwriting, debt and equity research, and advice on public offerings, leveraged buyouts,
and mergers and acquisitions. Banc of America was an underwriter of the Offerings.
Defendant RBC Dain Rauscher Inc. (“RBC”) was the corporate and investment
banking division of Royal Bank of Canada (the “Bank”). In March 2008, RBC Dain Rauscher Inc.
changed its name to RBC Wealth Management (“RBC Wealth”). RBC Wealth is a division of RBC
Capital Markets Corporation, which is a wholly owned subsidiary of the Bank. RBC was an
underwriter of the Offerings.
Defendant A.G. Edwards & Sons, Inc. (“A.G. Edwards”) is a full-service investment
brokerage subsidiary of Wachovia Securities, which was acquired by Wells Fargo & Company.
A.G. Edwards was an underwriter of the April 2006 and September 2007 Offerings.
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Defendant Merrill Lynch, Pierce, Fenner & Smith Incorporated (“Merrill Lynch”)
provides capital markets services, investment banking and advisory services, wealth management,
asset management, insurance, banking, and related products and services on a global basis. Merrill
Lynch was an underwriter of the April 2006, November 2007 and April 2008 Offerings.
Defendant BNP Paribas Securities Corp. (“BNP”) is the largest bank in Europe and is
active in the finance, investment and asset management markets. BNP was an underwriter of the
April 2006 Offering.
Defendant Goldman, Sachs & Co. (“Goldman Sachs”) is a leading global investment
banking, securities, and investment management firm that provides a wide range of services
worldwide to a substantial and diversified client base that includes corporations, financial
institutions, governments and high-net-worth individuals. Goldman Sachs was an underwriter of the
April 2006 Offering.
Defendant KeyBanc Capital Markets (“KeyBanc”) is a boutique investment bank that
provides financial advisory services. KeyBanc offers mergers and acquisitions advisory,
divestitures, initial public offering, capital restructuring, equity and debt financing, and corporate
loan syndication consulting services, and provides securities underwriting, interest rate risk
management, equity research and treasury management solutions. Additionally, KeyBanc offers
brokerage, equity trading and investment advisory services. KeyBanc was an underwriter of the
April 2006 Offering.
Defendant SunTrust Capital Markets, Inc. (“SunTrust”) is a full-service investment
bank that specializes in emerging growth companies in selected industries. SunTrust was an
underwriter of the April 2006 Offering.
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Defendant Wells Fargo Securities LLC (“Wells Fargo”) provides investment banking
services in the United States. Wells Fargo offers capital markets access through public offerings,
private placements and debt offerings, which include new issue underwriting of high yield bonds and
private placements, as well as market making, research and equity trading. Wells Fargo also
provides advisory services for mergers and acquisitions. Wells Fargo was an underwriter of the
April 2006 Offering.
Pursuant to the 1933 Act, the defendants referenced in ¶¶46-59 above are referred to
herein as the “Underwriter Defendants.”
The Underwriter Defendants are liable for the false and misleading statements in the
Registration Statements and Prospectuses. In connection with the Offerings, the Underwriter
Defendants drafted and disseminated the Registration Statements and Prospectuses and were paid
substantial fees in connection therewith. The Underwriter Defendants’ failure to conduct an
adequate due diligence investigation was a substantial factor leading to the harm complained of
The Public Offering Materials Misstated and Omitted
Material Facts Regarding Barclays’ Credit Market Exposure
In the years leading up to 2006, the U.S. housing market boomed as a massive
volume of mortgage loans were given to higher credit risk consumers. Mortgage brokers and lenders
began to relax their lending standards and issued mortgages on increasingly risky terms to the lender
in order to compete for business and capitalize on the expanding market. Demand for homes amid
lower interest rates and easy credit terms fueled a rise in home prices. Rising home prices fueled a
building boom in new homes. Inevitably, as lenders attempted to expand to ever more potential
homebuyers, aggressive and oftentimes predatory lending practices by U.S. lenders spurred ever
increasing loans to U.S. borrowers whose ability to repay their loans became questionable and
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particularly sensitive to interest rate changes. The end result was that millions of home buyers were
able to borrow much more money than they could realistically afford to repay.
Lenders were willing to extend loans to riskier borrowers because there were
mortgage purchasers in the secondary market willing to relieve the lender of the risk associated with
these loans. Investment banks bundled mortgages into various security and debt obligations, or
mortgage-backed securities (“MBS”), which were sold in turn to investors. RMBS were a common
type of MBS which were created by originating and purchasing thousands of residential mortgages,
pooling them together, and then issuing securities that entitled the purchaser to a specified payout of
the cash generated when borrowers made payments on the underlying mortgages.
In order for the cash flows of the underlying mortgages to flow through to the RMBS
security holder, each RMBS identified at least one mortgage processing agent (usually an institution)
that was responsible for servicing each of the mortgages in the RMBS pool. When the RMBS was
then marketed and sold, the purchaser was able to view all the information relevant and necessary to
justify the price charged for that asset. In the instance of RMBS, that included the detailed
underwriting analysis of each mortgage in the pool and its subsequent payment history. To the
extent any information was lacking, the RMBS holder could obtain that information from the
identified servicing agent. In this way, Barclays had access to any and all information necessary to
evaluate the risk of each of the RMBS it held.
Barclays’ Residential Mortgage Exposure
The term “Alt-A” is shorthand for “Alternative to Agency,” which historically meant
loans not meeting the published standards of Freddie Mac or Fannie Mae. An Alt-A loan falls just
above subprime status, but below that of a “prime” loan because of deficiencies in the borrower’s
credit profile. For example, an Alt-A borrower typically cannot provide complete asset or income
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documentation. Other characteristics of Alt-A loans include: (i) LTV in excess of 80%, but that
lacks primary mortgage insurance; (ii) a borrower who is a temporary resident alien; (iii) the loan is
secured by non-owner occupied property; or (iv) a debt-to-income ratio above traditional limits.
During the offering period, Barclays held more than ?5 billion (par) worth of Alt-A mortgages and
“Subprime RMBS,” are residential mortgage-backed securities in which the
underlying collateral consists of subprime mortgages. Subprime mortgages carry a significantly
higher default risk than prime mortgages or even Alt-A mortgages due to the creditworthiness of the
borrowers who take out these loans. Essentially, an investment in subprime RMBS is an investment
in a pool of subprime home mortgage loans. During the offering period, Barclays held more than ?6
billion (par) worth of subprime mortgages and RMBS.
In fact, shortly after the first offering and in an effort to expand its subprime
origination, servicing and securitization business in the United States, Barclays acquired two large
U.S.-based mortgage companies. First, the Company acquired mortgage servicer HomEq Servicing
Corporation (“HomeEq”) in June 2006 from Wachovia Corporation (“Wachovia”) for $469 million.
The transaction was completed in November 2006.
Then Barclays announced in January 2007 that it was acquiring EquiFirst Corporation
(“EquiFirst”), the non-prime mortgage origination business of Regions Financial Corporation
(“Regions”), for $225 million. At the time of the announcement, EquiFirst was the 12th largest
“non-prime” wholesale mortgage originator in the United States. EquiFirst was originating its loans
through over 9,000 brokers in 47 states, and was to be combined with BarCap’s active U.S.
wholesale loan mortgage business, mortgage servicing, and capital markets capabilities to create a
vertically integrated mortgage franchise for the purchase and securitization of non-prime mortgages.
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According to the Company, all the loans originated by EquiFirst were expected to be securitized or
sold after an average hold period of approximately two to three months.
By April 2007, however, indications that the subprime mortgage market was
collapsing had decimated valuations of subprime-related companies and their assets. On April 3,
2007, Barclays reported that due to massive “operating losses” at EquiFirst, Barclays would
complete its purchase of EquiFirst from Regions for only $76 million, 67% less than the $225
million originally announced by the Company on January 19, 2007. A Barclays spokesman said
the lower price reflected declining housing prices and higher mortgage delinquencies in the
subprime sector. Notably, Barclays closed the EquiFirst deal on the same day that New Century
Financial, one of the largest subprime mortgage lenders in the United States, announced it was filing
In 2007 and 2008, Barclays also had ?5 billion of gross exposure to CDOs backed
primarily by subprime/non-prime mortgages. Of this amount, 24% or ?1.2 billion consisted of
mezzanine CDOs. Mezzanine CDOs were particularly risky and susceptible to the decline of the
subprime mortgage market because they were backed by nothing more than the lowest-rated and
highest-risk tranches of RMBS. In fact, Barclays’ mezzanine CDOs were susceptible to catastrophic
loss, even at relatively benign stages of what would become the subprime financial crisis. The
collateral underlying Barclays’ ?1.2 billion of mezzanine CDOs consisted of 50% subprime
mortgages. Not only did Barclays fail to quantify its total exposure to CDOs, but the Company also
did not disclose that 100% of its mezzanine CDOs could be wiped out even if the default rate of the
underlying subprime mortgages was significantly less than 100%.
Barclays also materially misrepresented its exposure to monoline insurers. By the
end of 2007, the Company had a notional exposure of £21.5 billion to monoline insurers, which it
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weighed against assets the Company valued at £20.2 billion, for a “net” exposure of £1.3 billion.
These assets, however, were primarily made up of collateralized loan obligations (“CLOs”) valued at
more than £14 billion, U.S. RMBS (more than £2 billion), and commercial mortgage-backed
securities (more than £2 billion). Even though these investments were purportedly “hedges,” they
represented significant exposure to U.S. subprime mortgage losses and ultimately resulted in
significant losses to the Company.
Because Barclays’ massive exposures to CDOs (and other market-traded securities)
were hedged by insuring those investments with monoline insurers, the monoline insurers’ ability to
absorb losses on the billions of dollars of subprime/non-prime assets they insured was critical to
Barclays. In the event the monoline insurers failed – and many did – exposure on hedged CDOs was
no different than exposure to unhedged and mezzanine CDOs. Downgrades in the credit ratings of
those issuers also called into question their ability to cover any losses on those assets they had
guaranteed. Therefore, the nature, extent and concentrations of risk associated with these monoline
exposures were required to be disclosed under the applicable International Financial Reporting
Standards (“IFRS”) rules described at ¶¶136-151. The purpose behind the IFRS disclosure
requirements was to warn investors about concentrations in financial instruments that may result
in losses under changed conditions – not to wait until those losses were substantial and realized and
then disclose the concentration of risk after the losses were recorded. But that is exactly what
Barclays did here.
By mid-2007, it became clear that monoline insurers, whose traditional business had
been insuring relatively safe bonds issued by government authorities, had overextended themselves
by insuring hundreds of billions of dollars worth of subprime-backed CDOs and other mortgage-
backed assets. While their traditional business model had allowed them to operate with relatively
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small capital bases in comparison to the notional amount of those assets they guaranteed, their
expansion into insuring much riskier financial instruments resulted in a much greater concentration
of risk. Accordingly, the notion that such assets were “hedges” was illusory, as monoline insurers
could quickly be wiped out, leaving the holders of such assets to absorb the entire loss themselves.
On March 14, 2007, The Wall Street Journal reported that “[t]raders also were looking for trouble in
two insurers with exposure to the mortgage industry, MBIA Inc. and MGIC Investment Corp., which
were perceived as vulnerable to a wave of defaults.” Similarly, in a May 2007 presentation entitled
“Who’s Holding the Bag?,” which was widely reported in the financial press, hedge fund manager
William Ackman asserted that MBIA and Ambac Financial Group, Inc. (“Ambac”) were “effectively
insolvent” on account of predicted losses arising from their insurance of subprime-backed CDOs and
other subprime-related assets.
Yet the Company did not disclose any of its exposure to monoline insurers to
investors in the Series 2, 3 or 4 Offering Materials. In fact, Barclays did not disclose any of its
exposure to monoline insurers until it pre-announced Barclays’ 2007 year-end results on February
18, 2008. But even this disclosure, which was included in the 2007 Form 20-F (and incorporated
into the Series 5 Offering Materials), was false and misleading, however, because Barclays only
provided its “net exposure” of £1.3 billion, and no other information regarding its true concentration
of risk associated with the monolines. In fact, Barclays had insured more than £21.5 billion in assets
with monolines, against a reported £20 billion in “fair value” underlying assets. At the time of the
2007 Form 20-F, however, Barclays had only written down the “fair value” of these insured assets
by £59 million, a fraction of the impairment that should have been taken.
The underlying assets were (but never disclosed in the Offering Materials) composed
of £5 billion of A/BBB-rated CLOs and MBS, another £5 billion of “non-investment grade” CLOs
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and MBS, and £5 billion of supposedly AAA-rated CLOs and MBS. Despite the fact that by
February 2008, the entire monoline industry faced utter collapse, along with those guarantees they
had issued, the Company had only written down its insured assets by .002%.
By June 2008, immediately following the Series 5 Offering, the Company began
taking significant writedowns on those underlying assets. As demonstrated in the chart below,
Barclays’ writedowns jumped from £59 million to £433 million between December 2007 and June
2008, and its “net” exposure leapt from £1.3 billion to £2.5 billion.
As at June 30, 2008
Credit Rating of
Fair Value of
None of this information was disclosed in the Series 5 Offering Materials, which only
incorporated by reference the 2007 Form 20-F, and did not provide the Company’s notional
exposure, fair value of the underlying assets, or any detail concerning the composition of the
During the offering period, Barclays also mislead investors concerning its exposure to
structured investment vehicles, or “SIVs.” In fact, the Company failed to disclose that Barclays had
at least £1.6 billion in exposure to SIVs at the time of the Series 2 Offering, and £900 million of
exposure at the time of the Series 3 Offering. SIVs were generally constructed to make money by
selling short-term debt and buying longer-dated and higher-yielding assets including bank bonds,
mortgage-backed securities and collateralized debt obligations. More specifically, Barclays created
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and financially backed several “SIV-lites” which were essentially collateralized debt obligations,
which pooled together bonds backed by mortgages and other asset-backed debt. The primary
difference between SIV-lites and other CDOs is that CDOs sell long-term senior debt to fund their
assets while SIV-lites raise senior debt in the short-term markets.
Barclays created four SIV-lite funds, called Cairn Capital, Mainsail II, Sachsen
Funding I and Golden Key. Beginning in 2007, however, these SIV-lites began to suffer huge losses
as the value of the long-term debt they bought plummeted, forcing them to sell the debt at a loss, and
while struggling to raise more funds in the commercial paper market, which simultaneously had
dried up. Even though Barclays did not “own” these investments, the SIV-lites contained a
“liquidity backstop” that allowed them to require Barclays to fund up to 25% of the value of the
commercial paper it issued if and when the market turned sour, causing investors became
increasingly worried about Barclays’ exposure to SIVs.
THE FALSE AND DEFECTIVE REGISTRATION STATEMENTS
The April 2006 Offering (Series 2)
On or about September 14, 2005, Barclays filed with the SEC the 2005 Registration
Statement using a “shelf” registration statement or offering process. Pursuant to that process, the
2005 Registration Statement permitted Barclays to sell securities in future offerings upon the filing
of a prospectus supplement to the 2005 Registration Statement. The 2005 Registration Statement
incorporated certain SEC filings:
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to “incorporate by reference” the information we file with
them, which means we can disclose important information to you by referring you to
those documents. The most recent information that we file with the Securities and
Exchange Commission automatically updates and supersedes earlier information.
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We filed our annual report on Form 20-F for the fiscal year ended
December 31, 2004 (the “2004 Form 20-F”) with the SEC on March 24, 2005 and an
amendment thereto on May 6, 2005. We have also filed extracts from a results
announcement by Barclays PLC for the six months ended June 30, 2005 under cover
of Form 6-K with the SEC on August 12, 2005. We are incorporating the 2004 Form
20-F, as amended, and the Form 6-K dated August 12, 2005 by reference into this
In addition, we will incorporate by reference into this prospectus all
documents that we file with the SEC under Section 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934 (the “Exchange Act”) and, to the extent, if any, we
designate therein, reports on Form 6-K we furnish to the SEC after the date of this
prospectus and prior to the termination of any offering contemplated in this
By early 2006, investors were increasingly concerned about financial institutions’
exposure to mortgage-backed securities. In a February 13, 2006 article entitled “Coming Home to
Roost,” Barron’s reported that the market was experiencing increased “anxiety” over “mortgage-
backed securities” given the “easy lending practices” that prevailed in recent years. Specifically, the
article reported that “[v]arious doomsday scenarios are being posited” and warned that a “looming
‘reset problem’” would lead to a “deadly feedback loop . . . in which forced home sales will diminish
collateral values, which, in turn, will foster yet more delinquencies and forced sales. Before the
crisis runs its course, the deflationary contagion will infect all manner of homes, from high-end to
starters.” The article also noted that because of the packaging of mortgages “all or most of the credit
risk on the loans is shifted to the investors in securitizations . . . [but] [s]hould this funding dry up,
the sector’s financing structure could seize up. And that would spell big trouble not only for sub-
prime borrowers, but for the entire U.S. housing market . . . and economy.”
On or about April 21, 2006, Barclays filed on Form 424B2 a prospectus supplement
to the 2005 Registration Statement for the April 2006 Offering (the “April 2006 Prospectus”),
pursuant to which defendants sold 30 million shares of the Series 2 Securities at $25 per share, for
proceeds of over $750 million.
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The April 2006 Prospectus provided virtually no information about Barclays. Instead,
it described the securities being offered and simply incorporated by reference Barclays’ previously
filed 2005 Form 20-F.
The Annual Report on Form 20-F for the year 2005 (“2005 20-F), filed on April 3,
2006 with the SEC and incorporated by reference into the April 2006 Prospectus, stated in pertinent
The Group’s profit before tax in 2005 increased 15% (£700m) to £5,280m
(2004: £4,580m). Total income net of insurance claims increased 23% (£3,225m) to
£17,333m (2004: £14,108m) whilst operating expenses excluding amortisation of
intangible assets rose 23% (£1,934m) to £10,448m (2004: £8,514m). Amortisation
of intangible assets was £79m (2004: £22m). Impairment charges and other credit
provisions rose 44% to £1,571m (2004: £1,093m).
Earnings per share rose 7% to 54.4p (2004: 51.0p), diluted earnings per share
rose 6% to 52.6p (2004: 49.8p). Dividends per share rose 11% to 26.6p (2004:
24.0p). Return on average shareholders’ funds was 21% (2004: 22%). Economic
profit was up 12%, in line with our expectations and a reflection of tight capital
management as well as a good business performance.
Non-performing loans increased £1,095m (27%) to £5,210m. Potential
problem loans increased £131m to £929m. Coverage of non-performing loans was
broadly steady at 66.2% (2004: 66.9%) while the coverage of potential credit risk
loans also remained stable at 56.2% (2004: 56.0%)
Our capital position remained healthy. Shareholders’ equity excluding
minority interests increased £1,556m (10%) to £17.4bn, primarily due to profit
retention. Total assets increased £386bn (80%) to £924bn. Weighted risk assets
increased £50bn (23%) to £269bn. The tier 1 capital ratio decreased to 7% (2004:
7.6%) and the risk asset ratio decreased to 11.3% (2004 11.5%).
Barclays Capital continued its very strong growth of recent years, with profit
before tax in 2005 rising 25% to £1,272m (2004: £1,020m). Income growth of 27%
was broadly-based across products and geographies. The year also saw continued
investment in building Barclays Capital’s scale and diversity in terms of geography,
products and people. As a result of investment and the profit performance, operating
expenses grew 28%. Market risk was well controlled with DVaR falling 6% to
£32m as a result of increased diversification. The rate of growth of earnings once
again exceeded the rate of growth of capital consumption.
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Barclays Capital delivered record profit before tax and net income. Profit
before tax increased 25% (£252m) to £1,272m (2004: £1,020m) as a result of the
very strong income performance driven by higher business volumes and client
activity levels. Net income increased 27% (£894m) to £4,167m (2004: £3,273m).
Total income increased 27% (£895m) to £4,270m (2004: £3,375m) as a result
of strong growth across Rates and Credit Businesses. Income by asset category was
broadly based with particularly strong growth delivered by credit products,
commodities, currency products and equity products. Income by geography was
well spread with significant growth in the US. Areas of investment in 2004, such
as commodities, commercial mortgage backed securities and equity derivatives,
performed well, delivering significant income growth. Market risk was well
controlled with average DVaR falling 6% to £32m (2004: £34m) as a result of
increased diversification across asset classes.
In an effort to reassure investors, the 2005 20-F also included a substantial discussion
concerning the Company’s “Risk Management.” In fact, the Company dedicated more than 30
pages to a discussion of its practices in evaluating and controlling various risks to the Company,
including whole sections dedicated to “credit risk management,” “Loan impairment: potential credit
risk loans,” and “Capital and liquidity risk management.”
The statements above in ¶¶84-85 from the April 2006 Offering Materials and the
documents incorporated by reference therein were materially false and misleading. Defendants
reasonably should have known, but did not disclose, that Barclays had total credit market exposure
of £30 billion. More specifically, defendants failed to disclose that Barclays credit market exposure
approximately £7 billion in ABS CDOs backed by risky U.S. subprime and
Alt-A mortgages and RMBS;
approximately £6 billion in U.S. subprime loans;
approximately £3 billion in U.S. Alt-A loans;
approximately £8 billion in commercial real estate;
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the substantial and material risk that Barclays’ exposure to Alt-A and
subprime loans, CDOs, and RMBS had on the Company’s stated capital ratio, shareholders’ equity
and its liquidity, and the risk that same exposure posed to the Company’s f