Ratings agency Standard & Poor's will appeal a ruling ordering it to pay nearly A$20 million (NZ$25m) in compensation and legal costs to more than a dozen Australian councils following a landmark victory against the global ratings agency.
The case paves the way for investors around the world to take action against S&P for financial ratings that turn out to be misleading.
Justice Jayne Jagot of the Federal Court yesterday found an S&P AAA rating - the highest - for ''grotesquely complicated'' financial products created by ABN Amro was misleading. It also gave ''negligent misrepresentations'' to the councils and their advisers, Local Government Financial Services.
The decision ends a three-year battle by 13 New South Wales councils, which collectively invested about $16 million in financial products nicknamed Rembrandt notes. The investments collapsed during the financial crisis and the councils lost 90¢ in every dollar.
Justice Jagot found ABN Amro contributed to S&P's contraventions by providing false statements and information. In particular, it told S&P that a volatility index, the Globoxx, had an average volatility of 15 per cent when it was actually 28 per cent. This number helped the Rembrandt notes get a AAA rating.
''S&P did not calculate the volatility for itself, although it could easily have done so and, in my view, was required to do so as a reasonably competent ratings agency,'' Justice Jagot found. ''I am satisfied that but for this error about volatility the [notes] could not have been rated AAA by S&P on any rational or reasonable basis.''
S&P's legal team said the councils' investment staff "acted utterly irresponsibly in investing in the Rembrandt notes" and should have done their own research.
Justice Jagot said this would require the council staff to have an unreasonably detailed knowledge of structured financial products. She also found that it was prudent enough to accept investment advice from LGFS, which itself took two months to understand the products, and a top rating from S&P.
S&P has said it will appeal.
The ruling means the councils can recover their losses and S&P and ABN Amro face up to $19 million in damages each, including legal fees.
LGFS was also ordered to pay compensation, but will receive more from S&P and ABN than it is expected to pay because it lost $16 million investing in the notes.
General manager at Bathurst Regional Council Dave Sherley said the council was pleased with the outcome and that its staff rely on financial advisers and rating agencies to have the skills they lack.
- Sydney Morning Herald