By Jane Wardell
SYDNEY, Nov 5 (Reuters) - Australia's Federal court issued a
landmark judgment on Monday that Standard & Poor's misled
investors by giving its highest rating to derivatives that lost
almost all their value in the run-up to the 2008 global economic
The Australian case marked the first time a ratings agency
had faced trial over the complex financial products widely cited
as one of the factors that triggered the crisis and could set a
precedent for future litigation around the world.
In a strongly worded judgment, Justice Jayne Jagot said S&P
and ABN Amro had deceived 12 local councils that bought the
triple-A rated CPDO, or constant proportion debt obligation,
notes created by the bank.
The councils were assured the so-called "Rembrandt" notes
bought from Australian Local Government Financial Services
(LGFS) in late 2006 had a less than 1 percent chance of
defaulting. Within six months, they had done just that and the
councils lost A$16 million ($16.6 million), or 90 percent of the
funds they had invested.
"S&P's rating of AAA of the Rembrandt 2006-2 and 2006-3 CPDO
notes was misleading and deceptive and involved the publication
of information or statements false in material particulars and
otherwise involved negligent mispresentations to the class of
potential investors in Australia," Jagot said.
"ABN Amro was knowingly concerned in S&P's contraventions of
the various statutory provisions proscribing such a misleading
and deceptive conduct," she added.
LGFS was also negligent and guilty of misleading and
deceptive conduct in failing to fully and accurately disclose
all of the material risk to the councils, Jagot ruled.
Jagot awarded the 12 councils in New South Wales state a
total of about A$30 million for losses and damages.
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 Australian 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.
Monday's ruling follows a judgment in September against
Lehman Brothers Australia, which found that firm breached its
legal duties when it sold collateralised debt obligations, or
CDOs, to a group of charities, councils and churches that
collectively lost A$250 million ($259 million).
($1 = 0.9645 Australian dollars)
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