Australian Court Rules that S&P Misled Investors

In a judgment issued on 5 November, Australia’s Federal court ruled that credit ratings agency (CRA) Standard & Poor’s (S&P) misled investors by giving its highest rating to derivatives that lost most of their value in the period preceding the 2008 global economic crisis.

In a strongly worded judgment, Justice Jayne Jagot said that S&P and Dutch bank ABN Amro had deceived 12 Australian local councils that bought the triple-A rated constant proportion debt obligation (CPDO) notes created by the bank.

The councils received assurances that the so-called ‘Rembrandt’ notes, which were purchased in late 2006 from Australian Local Government Financial Services (LGFS), had a less than 1% chance of defaulting. However, they subsequently defaulted less than six months later and the councils suffered a loss of A$16m, or 90% 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.”

Jagot also ruled that LGFS was negligent and guilty of misleading and deceptive conduct in failing to fully and accurately disclose all of the material risk to the 12 New South Wales councils, which were awarded about A$30m for losses and damages.

“We are disappointed with the court’s decision, we reject any suggestion our opinions were inappropriate,” S&P said in an emailed statement, adding that it plans to appeal the ruling.

The latest ruling follows a judgment in September against Lehman Brothers Australia, which found that the firm had breached its legal duties in selling collateralised debt obligations (CDOs) to a group of charities, councils and churches that collectively lost A$250m.

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