Australian municipal councils that lost millions on structured finance products have successfully sued investment bank ABN Amro, credit rating agency Standard & Poor’s and the finance company they bought them from, Local Government Financial Services (LGFS).
The 12 councils lost A$16 million (NZ$20m) on the constant proportion debt obligations, marketed as Rembrandt notes, which were created by ABN Amro and assigned a AAA rating by Standard & Poor’s.
The councils lost 93 per cent of the capital they invested in the Rembrandt notes they bought from LGFS in 2006.
Apparently some A$200 billion of these masterpieces were sold worldwide, not Rembrandts but CPDOs that is, and there was a defect in S&P's modelling of the volatility in the products.
Today's finding is not only the first adverse judgment against S&P worldwide, but it may also open up S&P to a further $20b in claims.
Federal Court Justice Jayne Jagot said on Monday that the councils were entitled to succeed in their damages against LGFS, ABN Amro and Standard & Poor’s which included negligence and misleading or deceptive conduct.
‘‘The councils have each proved that they suffered loss and damage as required to sustain their claims against LGFS, S&P and ABN Amro, the damage being the amount each paid for the Rembrandt 2006-3 CPDO notes less the amount they received on the cash-out of those notes,’’ the judge said.
She also said the councils were entitled to compensation from LGFS for breach of fiduciary duty.
Apart from the claims against LGFS, a subsidiary of the NSW Local Government Superannuation Scheme, for breach of fiduciary duty Justice Jagot said the damages should be split evenly between ANN Amro, Standard & Poor’s and LGFS.
LGFS also succeeded in its claim against ABN Amro and Standard & Poor’s for the Rembrandt notes that it did not sell to councils but sold to its parent company after the credit rating agency downgraded them from AAA rating to BBB+.
- Sydney Morning Herald