By Julian Bajkowski
Australian councils burned by toxic investments in collateralised debt obligations (CDOs) from collapsed bank Lehman Bros. have escalated their legal action and will try and rope-in ratings agency Standard & Poors in their bid to recover losses of around $200 million.
Litigation funder IMF said on Tuesday afternoon that it will file a new claim against S&P on behalf of 90 local governments, churches and charities on the back of two separate landmark decisions handed down by the Federal Court that found against Lehman and the ratings agency.
According to an IMF statement, the councils it is representing will allege that “the ratings given to the CDOs, the value of which plummeted during the global financial crisis of 2007 and 2008, were made without a reasonable basis.”
The legal action against S&P is being watched around the globe because it could open the door for other investors to pursue the ratings house to recover money lost through ultimately toxic instruments that were rated as AAA and AA grade investments.
IMF said in its statement that councils and other investors it is representing “were almost exclusively investing public funds to facilitate public works and community services [and] required high ratings by an independent, objective ratings agency for any investment they contemplated.”
The City of Swan (Western Australia) and Moree Plains Council (New South Wales) will front the claim as representatives of investors in the new action run by IMF.
The litigation funder said that the councils will allege that “S&P falsely represented that its credit ratings of the CDOs were objective, independent, uninfluenced by any conflicts of interest and reflected S&P’s true opinion regarding the credit risks that the CDOs posed to investors.”
They will also allege that “S&P did not have reasonable grounds for concluding the CDO’s should be assigned AAA and AA ratings.” and that the councils would not have invested in the CDOs “but for the representation and high ratings ascribed to the securities by S&P” thus incurring losses of around $200 million.
The latest action follows a potential settlement by Lehman’s liquidators in a separate matter over CDOs that appears likely to come through a “Scheme of Company Arrangement.” Under that settlement, investors could recover around 45 cents in the dollar.
“The Investors’ claims against S&P in the action filed today [Tuesday 16th April 2013] will be for the balance of their losses after receipt of any monies from Lehman,” the IMF statement said.
John Walker, executive director of IMF (Australia) Ltd – which is listed on the Australian Securities Exchange said that the new filing “will pave the way for further filings in Europe funded by IMF, on behalf of European pension funds, banks and other investors, seeking compensation for losses after investing in complex financial products.”
“These filings are expected to include a claim in the Netherlands against Royal Bank of Scotland NV and S&P and a claim in the UK against Moody’s,” Mr Walker said.
S&P did not have a statement to offer at the time of writing.
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