S&P Misled Investors On CPDO Notes Pre-Financial Crisis: Australian Court
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Global rating agency Standard & Poor’s has been found guilty of “misleading” Australian investors over the ratings of two constant proportion debt obligation (CPDO) notes created by banking giant ABN AMRO prior to the 2008 financial crisis, reported Bloomberg on Monday, in a landmark case that may set precedent for future litigation around the world.
Global rating agency Standard & Poor’s has been found guilty of “misleading” Australian investors over the ratings of two constant proportion debt obligation (CPDO) notes created by banking giant ABN AMRO prior to the 2008 financial crisis, reported Bloomberg on Monday, in a landmark case that may set precedent for future litigation around the world.
The Federal Court of Australia ruled that S&P had been “misleading and deceptive” in its rating of the two structured debt issues back in 2006, which caused twelve Australian councils to lose nearly $16.5 million, or 90 percent of the capital invested, as the financial crisis developed.
According to AFP, S&P had also assured the Australian Local Government Financial Services (LGFS), whom the councils bought the CPDOs from, that the notes had a less than one percent chance of failure; while granting these so-called “Rembrandt notes” the highest possible rating – AAA – available for securities.
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[quote]”S&P’s rating of AAA of the Rembrandt 2006-2 and 2006-3 CPDO notes was misleading and deceptive and involved the publication of information or statements false in material particulars, and otherwise involved negligent misrepresentations to the class of potential investors in Australia,” ruled Federal Court Justice Jayne Jagot.[/quote]ABN AMRO had also been “knowingly concerned in S&P’s contraventions of the various statutory provisions proscribing such misleading and deceptive conduct,” Jagot added, while dismissing claims that S&P had reached its opinion “based on reasonable grounds and as the result of an exercise of reasonable care.”
The Federal Court of Australia ordered S&P, ABN AMRO and LGFS to each pay a-third of sum lost back to the twelve councils – mostly mining and farming towns – plus interest.
LGFS is also entitled to damages from S&P and ABN Amro, Jagot ruled.
In a statement to Bloomberg, Richard Noonan, a Melbourne-based spokesman for S&P, said that the company was “disappointed” with the court’s decision and will take legal advice on whether to appeal; Jagot had also rejected the rating agency’s arguments that the councils should bear a part of the blame due to their “contributory negligence”.
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The 1,459-page ruling is a “major blow to the ratings agencies, which for years have had the benefit of profiting from the assignment of these ratings,” told Amanda Banton, a partner at law firm Piper Alderman, which represents the councils, to Bloomberg after the ruling.
[quote]“Today’s judgment will ultimately have the effect of ensuring ratings agencies are accountable and promoting transparency in the ratings process,” she said.[/quote]
