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November 6, 2012 7:45 am
Standard & Poor’s faces the prospect of further legal action in the Australian courts over the rating of risky structured products after a litigation specialist said it would back a class action lawsuit.
IMF Australia, a Sydney-based company that provides funding for legal claims, said it had agreed to support a claim against S&P over the rating of constant proportion debt obligation notes (CPDOs) that were created and sold by the wholesale banking arm of ABN Amro in 2006.
Justice Jayne Jagot found S&P had misled and deceived investors when it awarded its highest grade credit rating to CPDOs whose value collapsed in the run-up to the financial crisis.
ABN’s wholesale banking arm, which is now owned by Royal Bank of Scotland, was also found to have engaged in conduct that was misleading and deceptive.
Overnight in New York, shares in McGraw-Hill, the parent company of S&P, fell 4 per cent to US$52.24 on concerns that Monday’s ruling in Australia could pave the wave for other claims in New Zealand, Europe and the US.
S&P and ABN were sued by 12 local authorities in New South Wales that lost more than A$16m when they invested in the securities.
The councils have been awarded A$30m of damages and costs after Justice Jagot concluded that “a reasonably competent rating agency” would never have given the securities a triple-A rating.
The case marked the first time a rating agency had stood a full trial over complex structured finance products. S&P has said it will appeal against the ruling and rejects suggestions that its “opinions were inappropriate”.
The latest action has been brought by another local authority in New South Wales on behalf of investors who also purchased the complex securities from ABN. In total, ABN sold about A$50m of this particular class of CPDO, also known as the Rembrandt Notes 2, to investors in Australia.
Muswellbrook Shire, which is two-hour drive from Sydney and home to some of Australia’s biggest coal mines, said it was looking to recoup A$150,000 to A$300,000 of “interest” forgone in part of its claim.
Mayor Martin Rush said no planned public works had to be cancelled as a result of its investment in the notes.
John Walker, executive director of IMF Australia, said he expected investors in New Zealand to launch a claim against S&P and ABN Amro in the near future.
IMF Australia is also investigating action in Europe on behalf of banks and pension funds. The company estimates that CPDOs worth approximately €2bn were sold in the Netherlands by ABN and rated by S&P.
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