Lehman payback to burned councils inches closer

By Julian Bajkowski

Local governments and ratepayers financially stung by the collapse of merchant bank Lehman Brothers are poised to recover close to 50 cents in the dollar from their losses after lawyers representing dozens of councils said liquidators of the failed institution had finally agreed to a settlement, conditional on Court approvals.

Litigation funder Bentham IMF Limited (IMF) (ASX: IMF) and law firm Piper Alderman said on Monday 2nd December that 69 councils, church groups and charities were now “a major step closer” to having their claims for about $180 million in damages related to toxic collateralised debt obligations (CDOs) resolved, a move that would allow around half of the money lost by Lehman to be returned.

Councils and charities were left holding the toxic derivatives, which were marked as AAA investment grade by ratings agency Standard&Poors (S&P), when the bank hit the wall during the Global Financial Crisis in 2008.

A separate class action, also backed, by IMF is also now underway to try and recover the remainder of the lost money from the S&P in the hope that the ratings agency will be forced by the Federal Court to cough up the remainder of the lost money in the form of damages.

The executive director of IMF, John Walker, told Government News that the next stage of the class action against S&P was now set to go to a hearing in the Federal Court scheduled for 17th and 18th of December 2013.

The matter, which is being vigorously contested by the S&P, continues to garner global attention in banking and financial circles because it goes to the heart of what potential liability for damages may be borne by ratings agencies who grade

The efforts by councils to try and recover money lost on junk stamped AAA has been a long and arduous one.

In September 2012 Justice Steven Rares of the Federal Court handed down a sharply critical judgement against Lehmans that squarely laid the blame for the losses with the defunct bank.

In the decision, Justice Rares said the question of how “relatively unsophisticated Council officers came to invest many millions of ratepayers’ funds in these specialised financial instruments” was the fundamental question in the case.

He found Grange Securities, which marketed the toxic products, had essentially tricked the local governments into taking up the derivatives against their instructions and intentions.

That decision was then followed by a further decision by Justice Jayne Jagot of the Federal Court that found that another group of councils were entitled to seek damages from S&P because toxic products were deceptively marketed to them using a AAA rating issued by the ratings.

Justice Jagot said it was accurate to describe the financial products sold to councils as “grotesquely complicated” and labelled their marketing by ABN Amro subsidiary Local Government Financial Services as “hopelessly deficient in alerting councils to the risks of this investment.”

“S&P’s rating was hopelessly deficient too,” Justice Jagot said.

According to the joint statement issued by IMF and Piper Alderman, the final Lehman’s settlement is “conditional now on the Federal Court approving separate applications: one from IMF clients for approval of the class action settlement and the other from Lehman’s liquidators for Court approval to their entry into the settlement agreement.”

“The applications are expected to be heard in December. If they are successful, distributions to Lehman creditors, including the 69 class action members, are expected to commence in April 2014 and run through to June 2014.”

Piper Alderman Partner Amanda Banton said the firm’s clients “were conservative investors who should never have been approached to buy these CDOs in the first place.

“They were simply not in a position to understand the risks involved, including that of losing all of their money. It’s very pleasing today to have passed this major hurdle in having our clients’ claims resolved,” Ms Banton said.

IMF’s John Walker said that the financial losses caused by Lehman had hit his clients’ work in the community, whether this was building parks and roads or assisting disabled children.

“Today’s announcement finally puts the claimants within sight of financial relief. It has been a marathon battle and they should be commended for their patience and tenacity in pursuing a just outcome,” Mr Walker said.

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