‘The food sucks and the sex is worse’: Barclays fraud trial execs joked about prison
Ex-Barclays bosses on trial for fraud joked about going to jail while organising a crucial capital raising drive at the height of the financial crisis, with wealth manager Tom Kalaris saying “the food sucks and the sex is worse”.
Another executive, Richard Boath, expressed fears the bank would be “basically dead” if it were unable to secure a £1bn investment from Qatar as it tried to avoid a government bailout during the crash, a court heard today.
It was the second day of the trial of four former Barclays executives, including its former chief executive John Varley, on charges of fraud. The other three defendants are Roger Jenkins, former head of the bank’s investment banking division Barclays Capital; Kalaris, former boss of Barclays’ wealth management division; and Boath, former head of the bank’s European financial institutions group.
A fifth executive, Chris Lucas – who was at the time financial director of Barclays Group – has been named as part of the conspiracy but is not on trial due to ill health.
Read more: Ex-Barclays executives ‘made secret Qatar payments to avoid government bailout’, court told
Today, the prosecution presented evidence including emails between executives, transcripts from recordings of phone calls made from Boath’s phone – which were taped, as he was a trader – as well as testimony from witnesses.
In one recording, Boath concurred when another senior employee – Barclays Asia chief executive Robert Morrice – said of Qatari investors: “They've got us by the balls because the price is so low”.
The closely-watched case, brought against the four executives by the Serious Fraud Office (SFO), is the first criminal trial of bank bosses in the UK since the global financial crisis.
Richard Boath said the bank was “basically dead” without Qatari money (Source: Getty)
On the opening day of the trial yesterday, prosecutor Ed Brown told a jury at Southwark Crown Court that Barclays executives had used a pair of bogus advisory services agreements (ASAs), worth £322m together, in order to effectively pay Qatari investors an inflated fee for their investment during a capital raising round in 2008, while paying a lower rate to other investors.
The defendants have all pleaded not guilty, and claimed the ASAs were genuine contracts for services.
The court was told that Qatari investors played “hardball”, forcing executives to find a fee workaround in order to entice them into making an investment that would preserve the bank’s financial independence.
Push for investment
The SFO claims Barclays was scrambling to raise money from investors, in order to avoid having to accept a government bailout which would have compromised the bank’s independence. The undertaking, dubbed “Project Heron”, became a focus for senior executives in the bank.
By mid-May 2008, the court heard, Barclays had identified four “strategic investors” – a “core group of potential investors”– that could help it raise the funds needed: Temasek, which was described as “effectively a Singaporean sovereign wealth fund”, the China Development Bank (CBD), a Japanese conglomerate called Sumitomo, and the Qataris.
In May, Kalaris emailed Barclays executives including then-president Bob Diamond and Varley, saying “Roger has had a preliminary conversation with Sheik Hamad”, the Prime Minister of Qatar, in which Hamad indicated the Qataris were keen to invest £1bn, or up to £1.5bn, into the bank.
John Varley is the most senior Barclays executive to have been charged (Source: Getty)
Responding to Kalaris in an email to Varley, Diamond wrote: “Tried to call know you are busy. This is HUGE, so pumped!!!!
“This, if we can close makes CBD so much more certain!!” he added.
“Made my day, know we have to get it over the line, but it’s start-ng [sic] point for the conversation,” Varley replied.
“Barclays perceived that a strategic relationship with the Qataris could be very valuable, as the country had enormous wealth and intended to be proactive managers of that wealth,” said Brown. “In turn, Barclays hoped that there would be a ‘succession of opportunities’ in providing various banking services, from which Barclays could earn banking fees.”
Despite their eagerness to raise capital, Brown said, executives were keen to avoid any suggestion of “desperation and panic” within the bank.
“The more capital raised, the greater the stability and confidence in the market,” he said.
“However,” he added, “if Barclays sought to attract investment but then failed to do so, that would send out a message of course that Barclays was unpopular, unattractive, and weak, and attract, therefore, a loss of confidence.”
The prosecutor said this pressure meant the bank was disinclined towards offering unusually favourable rates to prospective investors.
“The view within Barclays was that they needed to be in line with market practice (so as not to look weak) and offer commission rates that were normal for that type of underwriting,” said Brown.
However, he said tacking to the standard market rate also risked pushing Barclays into a “worst case scenario”, in which they would pay a two per cent fee to all investors, with a further 10 per cent discount on the share price – something Brown said the bank wished to avoid.
The jury was shown documents in which the directors affirmed they would notify potential investors about any change to the terms of the prospectus. The document outlining the terms of investment provided to the Qataris said: “Barclays has not agreed to, nor intends to pay any fees, commissions, costs, reimbursement or other amounts to the investors.”
‘Hardball’ Qataris
Conversations between executives revealed the bank’s efforts to secure acceptable terms from the Qataris, from whom they secured a £2bn investment.
Presenting a series of emails, Brown described how the defendants reached an agreement with the Qataris, who were nicknamed “Quail” during some communications.
Kalaris emailed Varley on 28 May, copying in Diamond and Jenkins.
“Have heard from Quail; more time required,” he wrote. “Hamad says he wants to do this […] frankly a little harder ball than either Roger or I expected’”
In an email titled “Cigars went well”, sent to Varley on 23 June 2008, Jenkins described the negotiations.
“There has been a lot of work with [Q]uail over the weekend which I’d like to brief you on,” he wrote. “They are playing hardball…”
Brown said the bank was in a difficult negotiating position because of executives’ eagerness to secure investment.
“[The Qataris] were in the driving seat, they were the strong party,” he said.
Roger Jenkins was Barclays’ head of investment management in the Middle East (Source: Getty)
In an email to then-Barclays chairman Marcus Agius, sent on 5 June 2008, Varley wrote: “Quail is bagged at 2bn of the conditional. Very helpful underpin. Took longer than I had hoped, but these people are the new cocks of the roost.”
Brown said a 3.25 per cent commission fee for the Qataris’ investment “must have been agreed” by this point.
He said: “It was recognised that, if Qatar’s agreement to subscribe was conditional on payment of the additional fee (or vice versa), it would have to be disclosed; and that the same level of payment simply could not be offered to others in the market.”
He added that the means of paying the additional fee would need to be “ostensibly free-standing”.
In a transcript from a call between Lucas and Boath on 11 June 2008, the former said: “The only sensitivity I've got about Quail is, is this additional fee,” adding “absolutely we cannot have it as something that we're offering everybody else.”
Boath told Lucas that Barclays needed to find a “mechanism” in order to pay the fee.
Brown said Qatar was “not primarily interested in a strategic relationship with Barclays”, saying the Qataris instead simply “wanted the fee for underwriting the capital raising”.
Brown said by “mid-afternoon” on 11 June 2008, following the presentation of the proposed Qatari investment to the board of Barclays, senior executives had devised using an “advisory relationship” as a “mechanism” for paying the extra fee.
The jury was played an audio recording of a conversation between Kalaris and Boath that day. Kalaris told Boath he had “sorted out a mechanism with Roger [Jenkins]”, which he said was “to do with” an “advisory relationship”.
Brown alleged that by this point, Varley had agreed to pay the Qataris a higher rate, of 3.5 per cent. He said Kalaris knew he would have to “sign-off” on the use of the mechanism.
Boath spoke to Kalaris on the phone that day, during which Kalaris expressed concerns that “other payments” were not being disclosed.
Boath told Kalaris the prospectus for the capital raising would disclose that Barclays had entered into memorandums of understanding with some investors.
They discussed getting a lawyer at the bank to re-check the details of the process.
Boath said: “We all know that whatever we enter into we are entering into in exchange for the subscription agreement.”
“None of us wants to go to jail here,” said Kalaris.
“That, I mean, it ain’t worth it and apparently the food sucks, so, right. You know, that’s the purpose of the call,” responded Boath.
“Yeah. No the food sucks and the sex is worse, so,” replied Kalaris.
“Absolutely,” said Boath.
Witnesses describe pressures
The SFO presented testimony from witnesses who were employed by Barclays at the time of the capital raising.
Brown described testimony from two witnesses: Joanna Baker, a director within Barclays’ corporate division (BCD), and Daniel Meredith-Jones, a colleague of Baker.
“Joanna Baker, and Daniel Meredith-Jones who worked alongside her, had regular meetings with John Varley once or twice a week, and with Chris Lucas… to keep each other up to date and to look at the information coming through so that they could react and see what needed to be done,” said Brown.
Barclays needed to raise capital to avoid a government bailout during the crash (Source: Getty)
Brown said Baker was asked to find a work-around which would allow a higher fee to be paid to the Qataris, but was unable to do so. He said she became concerned about the possibility of the ASAs being used to pay the Qataris a higher fee.
“It was her clear perception that the ASA was a way of paying Qatar the additional fees that they had asked for – an alternative mechanism for solving the problem with the 3.25 per cent,” said Brown.
“Her concerns were two-fold,” he added. “One was the risk that it would be seen as a hidden commission and the second was that if they were going to enter into something called an advisory services agreement the board had to be comfortable that it was a sensible commercial agreement and that they were getting services that represented value for money.”
Brown told the jury that Baker sought to have her concerns escalated to the bank’s board.
“She was also concerned that anybody reading about the agreement would probably make the connection for themselves and that would cast Barclays in a bad light,” said Brown. “Joanna Baker at that time felt that her role was to raise her concerns and make sure they were escalated so that the board had the full facts to make a decision.
“She was reassured that the board of Barclays had seen the information, had considered all the facts and had reached a decision on that basis to enter into the agreement”.
“She was misled in that regard,” he said.
The trial, which is expected to take around six months, continues.