An Australian Federal Court judge has ruled against rating agency Standard & Poor’s and the wholesale division of Dutch bank ABN AMRO for their role in the sale of “grotesquely complicated” financial products which plummeted in value during the global financial crisis.
The suit was brought by 12 municipalities in New South Wales that are seeking to recover more than $15 million in losses after purchasing synthetic derivatives known as constant proportion debt obligations, or CPDOs, which were created by ABN AMRO’s wholesale division and given S&P’s highest AAA rating in 2006. Local Government Financial Services (LGFS), an investment manager for local government authorities that sold CPDOs to the 12 municipalities, is also a defendant in the case.
ABN AMRO’s wholesale division was subsequently acquired by RBS.
Judge Jayne Jagot ruled that ABN AMRO, S&P and LFGS had all engaged in “misleading and deceptive” conduct in the packaging and rating of the CDPOs. She wrote in her decision that “no reasonably competent ratings agency” could have rated the derivatives AAA.
Piper Alderman Sydney partner Amanda Banton, who represented the plaintiffs, hailed the decision. “This is a major blow to the ratings agencies, which for years have had the benefit of profiting from the assignment of these ratings without ever being accountable to investors for those opinions,” he said.
S&P told the Financial Times it would appeal the decision. “We are disappointed with the court’s decision, we reject any suggestion our opinions were inappropriate and we will appeal the Australian ruling, which relates to a specific CPDO rating,” the agency said. RBS said it was studying the decision.
Banton also represented the plaintiffs in another class action decided in September. In that case, the Australian Federal Court handed down a more than $200 million decision against Lehman Bros.’ local subsidiary for selling similarly complex financial products to 72 municipalities, churches and community organizations.
Both cases were backed by litigation funder IMF (Australia) Ltd. Executive director John Walker says IMF is presently exploring other potential claims regarding issues of CPDOs in Europe that were sold by ABN AMRO and rated by S&P.