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Data a mistake, NSW court told

AN INVESTMENT banker employed by ABN Amro sent incorrect information to the credit rating agency Standard & Poor's about a structured finance product bought by local councils, but the Federal Court should conclude this was an innocent mistake or at worst carelessness, the bank's barrister said yesterday.

Ian Jackman, SC, said emails sent in 2006 did not support allegations by the councils that Mike Drexler, a former ABN employee who had previously worked for S&P, had knowingly sent S&P fabricated historical data for its computer modelling.

''Deliberate falsehood is the least likely explanation because it's inconsistent with someone who provides all the underlying data and encourages S&P to check it themselves,'' Mr Jackman said.

The councils are suing to recover losses on a product called a constant-proportion debt obligation, which was created by ABN and assigned a AAA credit rating by S&P.

The value of the CPDO, marketed under the name Rembrandt notes, was linked to moves in the iTraxx credit default swap index in Europe and its US counterpart,

the Dow Jones CDX.


Mr Drexler sent an email to S&P in 2006 saying the historical volatility of the two indices, which had been trading for 2½ years, was 15 per cent.

''He makes a mistake, we now know because the experts [called to give evidence in the case] haven't been able to work back to get the conclusion he got,'' Mr Jackman said. ''But he sets out in an attachment … the data that he based his analysis on for S&P to run their checks on,'' he said.

He also said Justice Jayne Jagot should reject a submission by the councils that the volatility figure was central to S&P's decision to rate the notes AAA.

A 2006 email written by an S&P analyst, Sriram Rajan, referred to a JPMorgan index and said, ''We use this over their [ABN's] history given the latter has a short history.''

Thirteen councils lost $16 million, or 93 per cent of the capital they invested in Rembrandt notes.

Their claims against ABN, S&P and the company that sold them the notes, Local Government Financial Services, include misleading or deceptive conduct and negligence. Closing submissions continue.