Grange Securities, the Australian arm of failed investment bank Lehman Brothers bought collateralised debt obligations (CDOs) for councils even though they advised the firm not to, the Federal Court has heard.

Class action against the investment bank began on Wednesday. It included 72 councils, charities and schools, led by Wingecarribee Shire Council, the City of Swan and Parkes Shire Council.

The representative plaintiffs claimed the investment bank breached contracts with the clients by investing in CDOs linked to the US sub-prime mortgage market. The CDOs were bundles of debt from mortgages, credit cards or company debt, grouped into portfolios and sold to investors.

Wingecarribee claimed a loss of $21.4 million, Parkes claimed $10.1 million and Swan claimed $5.8 million.

The plaintiffs claimed the bank engaged in misleading, deceptive and negligent behaviour and breached fiduciary duties.

Tony Meagher, SC, acting for the plaintiffs, told the court Douglas Neville, financial services manager at Wingecarribee, specifically requested a “conservative” investment portfolio with “no CDOs”. However, Grange Securities purchased CDOs on behalf of the council.

Mr Meagher referred to an email exchange between Mr Neville and a Grange Securities employee on 12 February 2007.

“Are these CDOs? As in our discussion it was quite clear that we were only going to invest in Floating Rate Notes where capital is 100 per cent guaranteed if the investment is held to maturity,” Mr Neville said in the email.

The class action is the first in the world to go to trial against former Wall Street giant Lehman Brothers, which collapsed in September 2008. The case is defended by Lehman Brothers Australia.