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The case for buying Barclays on bad news

The UK-listed bank has been charged on three counts by the Serious Fraud Office
June 22, 2017

Barclays' (BARC) investment case has an added, and serious, complication. The Serious Fraud Office's (SFO) decision to charge the bank, along with four of its former employees, with conspiracy to commit fraud has certainly introduced another 'known unknown'. The charges surround the bank's 2008 capital-raisings with Qatari investors, which helped stave off a government bailout following the financial crisis.

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The SFO said the charges relate to the banking group's capital-raisings with Qatar Holding and Challenger Universal in June and October 2008, as well as a $3bn (£2.37bn) loan made to the State of Qatar in November that year. Challenger was an investment vehicle of Qatar's then-prime minister Sheikh Hamad bin Jassim Jaber al-Thani.

Barclays has been charged with three counts: conspiracy to commit fraud by false representation in relation to the June and October fundraisings, and unlawful financial assistance. Former chief executive John Varley and former investment banking chairman Roger Jenkins have been charged with the same counts. Meanwhile, former European head of financial institutions Richard Boath and Barclays Wealth chief Thomas Kalaris have been charged in relation to the June capital injection.

The fraud charges centre on two advisory service agreements entered into with Qatar Holding in June and October 2008, Barclays said in a statement. The bank said it was considering its position in relation to these developments. It said it was also awaiting the SFO's decision about whether the banking subsidiary would be charged in respect of the loan.

Mr Jenkins' lawyer, Brad Kaufman at Greenberg Traurig, said: "Mr Jenkins intends to vigorously defend against these charges. As one might expect in the challenging circumstances of 2008, Mr Jenkins sought and received both internal and external legal advice on each and every aspect of the accusations levelled today by the SFO."

Representatives for Mr Varley and Mr Kalaris could not be reached for comment. Mr Boath told the Financial Times the SFO's decision to charge him was "based on a false understanding of my role and the facts". He added: "I repeatedly raised concerns about the decisions taken by the bank with both senior management and senior lawyers and was reassured that those decisions were lawful."

The Financial Conduct Authority had also started an investigation into whether Barclays properly disclosed fees it paid to Qatar and whether it lent money to Qatar to reinvest in the bank. In 2013 it issued the bank with a £50m fine for failing to disclose £332m in advisory fees paid to the Qatari investors. The regulator said in a statement: "We are pleased that this matter, which led to the stay of our own case, is now in the public domain. We welcome a fair and transparent hearing on the basis of the charges set out today by the SFO."

The UK banking sector has been no stranger to litigation since the 2008 financial crisis. However, this is the first time the head of a global bank has faced criminal charges for activities during the financial crisis. The question is to what extent this additional risk is priced into the shares and whether it poses a threat to the bank's capital levels. Cenkos analyst Sandy Chen said that while the bank could face censures or fines, he doesn't expect it to be seriously penalised for charges relating to the old regime.

However, Barclays and two of its former executives are also being sued by the US Department of Justice over the issuance of allegedly fraudulent mortgage-backed securities between 2005 and 2007 - a complaint that Barclays rejects as "disconnected from the facts", and said it would "vigorously defend". Investec analyst Ian Gordon thinks the financial implications of this could have more serious implications for Barclays. He reckons it would currently be difficult for Barclays to assess SFO-related provisions, since the information surrounding the case is not yet fully available.