Member News - TAGLaw

In November 2012, the Federal Court of Australia handed down a world-first court ruling against a ratings agency in relation to complex financial products known as constant proportion debt obligations or CPDOs.  CPDOs and other synthetic debt obligations have been widely cited as a key cause of the global financial crisis. The Court found against Standard & Poor’s (S&P), investment bank ABN AMRO and investment manager for local government authorities, Local Government Financial Services (LGFS) in a claim over investments sold to NSW councils prior to the GFC.

Amanda Banton of Piper Alderman (New South Wales, Australia) represented the 12 NSW councils involved in this successful and historic action which was funded by IMF (Australia) Ltd.  The Councils have now received judgment for damages in the amount of $14.9 million.

The damages, which Justice Jayne Jagot of the Federal Court awarded to the councils on 1 March 2013, represents their losses on the “Rembrandt” CPDO, rated AAA by Standard & Poor’s, which defaulted in 2008 paying noteholders back less than 10% of their principal invested. Justice Jagot also awarded the Councils interest on their damages from the date the Rembrandt CPDO “cashed out”, which amounts to a further $5.3 million.

In November last year Justice Jagot found that S&P was negligent as it owed a duty of care to investors, did not have reasonable grounds for assigning the AAA rating it assigned to the Rembrandt CPDO and could not rely on its disclaimers that the rating was merely an “opinion”. S&P was found to have engaged in misleading conduct by publishing the rating without having reasonable grounds for that opinion. ABN Amro, the arranger of the Rembrandt CPDO was also found to have been negligent and guilty of misleading conduct for passing on the unreliable rating and for its involvement in procuring the rating.

The Councils’ financial advisor, LGFS, was found to have breached the fiduciary duty it owed to the councils as it had a financial conflict of interest; and was found to be negligent for failing to adequately disclose the material risks of the product.

In the judgment, Justice Jagot confirmed that each of LGFS, S&P and ABN Amro will be liable to pay 33 1/3% each of Councils’ damages and interest.

Amanda Banton of Piper Alderman, who represented 12 of the councils, said:

“The judgment will allow our clients to finally recover the funds which since October 2008 they have been out-of-pocket.”

Summary of the Court’s Findings

The Court found that:

1. The Councils are entitled to damages in the amount of the face value which each Council invested in the Rembrandt Notes less the amount received by each Council at cash out, with no reduction for coupons already received.
2. The Councils are entitled to pre-judgment interest at the rate of 4% above the Reserve Bank cash rate from the date of cash out of the Rembrandt Notes, 24 October 2007, to the date of final orders.
3. The Councils are entitled to post-judgment interest from 1 March 2013 until the date which payment is received from the respondents.

Total losses: $14.9 m, plus a further $5.3 million interest (total for the twelve councils represented by Piper Alderman). See schedule below for a breakdown of each council’s damages and interest entitlement.

About Piper Alderman
Piper Alderman is a full-service, commercial law firm with offices in Sydney, Melbourne, Brisbane and Adelaide.  Our firm is committed to continual excellence in the practice of law and we pride ourselves on listening to our clients, responding to their needs and creating practical legal solutions.  For more information please visit http://www.piperalderman.com.au/