Securities Law

Did lawyers for Barclays cause $600M error?

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Barclays, a British bank, estimates that it will suffer a loss of nearly $600 million after it issued securities that exceeded the amount registered in the United States by about $15 billion.

The mistake triggers a right of rescission that requires Barclays to buy back the affected securities at the original purchase price, report MarketWatch, Bloomberg Quint, the Wall Street Journal and Reuters.

“It looks like an operational or legal failure,” said Jerome Legras, managing partner at Axiom Alternative Investments, in an interview with the Wall Street Journal. “It’s hard to believe they would do such a stupid thing. This honestly is the first time I’ve heard of something like this.”

An unnamed source told Reuters that the securities include two exchange-traded notes linked to crude oil and market volatility. They had increased in popularity following Russia’s invasion of Ukraine; Barclays suspended sales March 14.

Barclays registered the securities for sale with the U.S. Securities and Exchange Commission in 2019 in what is called a shelf registration. Barclays told regulators that it would sell about $20.8 billion in the investment products, but it actually sold about $36 billion, according to Bloomberg Quint.

Shelf registrations allow issuers to sell securities without getting regulatory approval for each block sold.

According to Bloomberg Quint: “Major banks typically file for blanket registrations that allow them to regularly issue notes that give clients a chance to bet on everything from market volatility to the performance of Tesla Inc. shares. Market observers couldn’t recall a bank’s issuance exceeding the amount it registered, let alone blowing billions past its limit.”

Bloomberg columnist Matt Levine suggested that the blame for the error may rest with lawyers.

Ideally, Levine said, the bank would keep track of the securities issued, subtracting each issuance from the amount it registered with the SEC.

“And if you just forget,” Levine wrote, “if some junior person in the internal legal team leaves, and forgets to pass along the ‘shelfcapacityleft_07.xls’ spreadsheet to her successor, and it stops being updated—then, uh. Then, at first, nothing happens. No bell rings. The SEC doesn’t call you up to be like, ‘I see you are selling securities illegally.’ (They don’t really keep track either.) … You just keep bopping along as though everything was fine, and then one day, a new junior analyst starts on the legal team and finds the ‘shelfcapacityleft_07.xls’ spreadsheet in a folder and asks the vice president, ‘Hey what is this?’”

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