Twelve councils in NSW are bringing actions against Local Government Financial Services, the body that invests council workers’ superannuation, for misleading and deceptive conduct and breach of fiduciary duty.
The group bought $45 million of financial products called Rembrandts and sold $18.5 million of them to councils including Bathurst, Oberon, Ryde, Deniliquin, Cooma-Monaro, Eurobodalla, Narrandera, Moree Plains, Corowa, Parkes and Orange. They returned 7 cents in the dollar.
In turn, Local Government Financial Services is preparing cross-claims against the credit ratings agency Standard & Poor’s and the investment bank that concocted the products, ABN AMRO. An action against Standard & Poor’s, upon whose triple-A rating and recommendations the councils and other investors relied when buying the financial products, would be unprecedented.
Yesterday, S&P issued a press release stating that Local Government Financial Services had been placed on ”CreditWatch Negative”. It said the negative outlook was based on concerns over the legal claim by the 12 councils.
”The irony does not escape me,” the LGFS chief executive, Peter Lambert, told BusinessDay.
A spokeswoman for Standard & Poors said: ”I’m sorry, I don’t want to comment on that”. Its chief executive, John Bailey, was unavailable for comment.
Mr Lambert said he was baffled as to why Standard & Poors had taken its action against LGFS on the basis of potential lawsuits rather than on its financial status, which was comfortably capitalised.
”We have close to $600 million in council investments. We purchased $45 million worth of Rembrandts [in November 2006] which were bought to on-sell to councils who were interested in high-yield products. They imploded during the course of the global financial crisis.”
Another group of councils in NSW, Tasmania and Western Australia are taking legal advice on the prospect of a claim against the Commonwealth Bank over $120 million of credit instruments called Oasis, Pure and Paladin which are now virtually worthless.
The products carried triple-A and double-A ratings from Standard & Poors.
Seven councils have signed up with the insolvency law firm Piper Alderman to pursue the Commonwealth Bank although the investment losses may spread to as many as 40 councils.
The councils in NSW, Tasmania and Western Australia say the bank took advantage of its long-term relationship with them to sell them products that are now mostly worthless.
The financial products at the core of the LGFS and prospective Commonwealth Bank actions are collateralised debt obligations (CDOs) and follow another lawsuit by councils against Lehman Brothers Australia which is now in the High Court.
The councils are claiming misleading and deceptive conduct against the collapsed investment bank. Lehman sold $1.2 billion worth of CDOs to Australian local councils, churches, charities and semi-government authorities. Lehman’s liquidator estimates roughly half that value – $600 million – has already been wiped out.
Piper Alderman has gathered 40 councils in a prospective class action. The councils are awaiting a judgement from the High Court on the Lehman deed of company arrangement and legal developments in the US and UK before proceeding.
In the Commonwealth Bank action the CDOs have lost far more than the 50 per cent losses experienced by Lehman investors.