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 13 councils lost $16 million 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 $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 $200 billion 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+.
S&P said it plans to appeal the ruling.
"We are disappointed with the court's decision, we reject any suggestion our opinions were inappropriate," the ratings agency said in an emailed statement.
Amsterdam-based ABN Amro, which was one of a number of Dutch banks that were nationalised as part of a government bailout in the 2008 crisis, was not immediately available for comment.
IMF Australia, a publicly listed company that funds large class-action lawsuits and financed the claim, said it is planning legal action in Amsterdam related to some 2 billion euros in CPDOs sold by ABN Amro and rated by S&P.
"This is a major blow to the ratings agencies, which for years have had the benefit of profiting from the assignment of these ratings without ever being accountable to investors for those opinions," said lawyer Amanda Banton of Piper Alderman, who represented the local councils.
"Today's judgment will ultimately have the effect of ensuring ratings agencies are accountable and promoting transparency in the ratings process," Banton added.
AAP, Reuters with BusinessDay