Catholic Online Forum

A group of Australian councils, charities and churches has won a Federal Court case against defunct investment bank Lehman Brothers in a case which could have global ramifications.

The judgment is considered a test case as it is the first in the world to look at the conduct of an investment bank, on both legal and ethical grounds, in the lead-up to the global financial crisis and how they behaved in the aftermath.

Today's ruling has implications for investors and regulatory authorities all round the world.

Ratings agency Standard and Poor's says it will appeal against a landmark ruling which will allow 13 local councils to recoup losses they suffered during the 2008 financial crisis.

The New South Wales councils, including Bathurst and Corowa, brought a class action against S&P, investment bank ABN AMRO and Local Government Financial Services (LGFS).

The councils claimed they were misled into losing almost $16 million in the financial crisis, saying S&P led them to buy complex investments called constant proportion debt obligation notes (CDPOs), which the agency had given a AAA rating.

Today's ruling found that rating was misleading and deceptive.

The ruling follows another in September against the now collapsed Lehman Brothers, which was found to have breached legal duties when it sold toxic derivatives to a group of charities, councils and church groups who collectively lost about $250 million.

Makes it sound almost as if this was some arbitrary edict issued by a Monarch.

I guess they broke some law?

Justice Steven Rares has ruled that the parties are entitled to compensation but the amount has yet to be finalised.

They had sought compensation for losses incurred on investments they made on advice from Grange Securities, which was bought by Lehman Brothers Australia in 2007.

The investments had exposure to the housing market collapse in the United States.

Members of the group were advised by Lehman's Australian arm before buying subprime mortgage-related derivatives or collateralised debt obligations (CDOs) branded locally as federation notes.

This was prior to 2007 when America's housing sector began to crash, sparking a meltdown on Wall Street.

Justice Rares found the investors were not properly advised of the risks involved in highly complex financial products.

He said councils were often targeted by Grange Securities because they had ready access to large sums of money for investment, but the the "high risk" nature of the investments made them unsuitable for local councils.

"I have found that Grange engaged in misleading and deceptive conduct in breach of [the act] when it promoted the SCDOs to the councils in terms of suitable investments," he said.

What ever happened to "caveat emptor: a principle in commerce: without a warranty the buyer takes the risk".

Bob,



It ceased to be a principle in law in 1974 (see above). This was confirmed in the new Act in 2010.


http://www.comlaw.gov.au/Details/C2012C00514

Bob,

Hardly new. In 1974 most of the people now on this planet weren't born.

And that is a quite sobering (depressing?) statistic to one such as I, who not only existed in 1974 but additionally, existed as the father of four children, the oldest being 14, who was already on the cusp of middle age!