Council digs for Lehman’s insurance policies

Toxic investments Image:iStock
Wingecarribee Shire Council is seeking to recoup losses made from CDO investments. Image: iStock

By Angela Dorizas

Wingecarribee Shire Council in New South Wales has won the right to proceed with attempts to access the insurance policies of collapsed US investment bank Lehman Brothers.

The council has been involved in a $2.5 million lawsuit against Lehman Brothers Australia over advice it received from the Lehman’s subsidiary, Grange Securities.

It is seeking to recoup funds lost through following the advice and investing in collateralised debt obligations (CDOs), including Federation CDO, a long-term, synthetic instrument based on residential mortgage backed securities linked to the US sub-prime market.

More than 35 councils across Australia invested a total of $25 million in Federation, with NSW councils ending up the hardest hit.

Wingecarribee Council went to the High Court on Friday to be granted the right to seek to uncover the policies. Justice Stephen Rares is yet to make a final ruling, but said it was a “legitimate and proper purpose of these proceedings to seek to ascertain whether there is a … insurance cover that responds to this claim held by Lehman Brothers”.

The case will be heard later this month.

If Wingecarribee succeeds in getting hold of Lehman’s insurance policies, it will give other councils a clearer idea of whether legal action is worth pursuing.

Last month, Wingecarribee Shire Council general manager Mike Hyde called on councils to join with Wingecarribbee in its efforts to recover losses.

“Councils should contact me because I can talk through some options to join in our actions and harvest the fruit of any potential court actions,” Hyde told GovernmentNews.

In April, a spokesperson for the NSW Local Government Minster, Barbara Perry, said the decision to pursue legal action was “a matter for individual councils in consultation with their legal advisers”.

“The Department of Local Government continues to monitor measures taken by councils to maintain financial sustainability during this period of economic downturn,” the spokesperson said.

“Councils have an obligation to their constituents to always seek independent financial advice when dealing with investments.

“The current unpredictable economic climate has served to reinforce the importance of this advice.”

Australian Local Government Association president Cr Geoff Lake said it was “unfortunate” that councils were caught with what now appear to be toxic investments and ratepayers deserved appropriate action to be taken to recover any losses.

“It is appropriate that councils consider their full legal rights if there is a case to mount against financial advice which was either misleading, or not in the best interest of councils,” Cr Lake told GovernmentNews.

“Councils have a responsibility to ratepayers to make sure all legal avenues are pursued in terms of trying to call back any money that appears to be lost.”

Related Story: Call for councils to sue for lost investment funds

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