Bathurst Regional Council v Local Government Financial Services Pty Ltd (No. 5) [2012] FCA 1200
| Author | Selva Veeriah |
ABN Amro Bank NV (‘ABN Amro’) arranged Rembrandt notes consisting of constant proportion debt obligations (‘Rembrandt notes’). The Rembrandt notes were a complex, highly leveraged credit derivative, operating over a term of 10 years.
ABN Amro retained McGraw-Hill International (UK) Limited (‘Standard & Poor’) to rate the Rembrandt notes. That was done for the purposes of communicating to potential investors the expert opinion of Standard & Poor regarding the credit worthiness of the Rembrandt notes.
Standard & Poor gave the Rembrandt notes the highest possible rating: that is, AAA.
Local Government Financial Services Pty Ltd (‘LGFS’) bought a substantial number of the Rembrandt notes from ABN Amro for on-sale to thirteen local councils, including Bathurst Regional Council (‘the Councils’). LGFS also acted as financial adviser to the Councils in respect of their investments.
The Rembrandt notes performed badly and certainly well below that expected of a AAA product. The Councils cashed out at a significant loss.
The Councils then sued ABN Amro, Standard & Poor and LGFS in the Federal Court of Australia to recover their losses.
The Councils alleged that, among other things, Standard & Poor had been negligent and breached the relevant provisions of the Corporations Act 2001 (Cth) and the Australian Securities and Investment Commission Act 2001 that prohibited misleading and deceptive conduct in relation to financial products.
The primary question before the Federal Court was whether Standard & Poor had any genuine and reasonable basis for reaching its conclusions regarding the quality and reliability of the Rembrandt notes.
The Councils contended that Standard & Poor had acted without a reasonable basis, in that, it used modelling inputs (i.e., market conditions used to simulate performance and outcomes) that no reasonable ratings agency would have used in the circumstances. Further, Standard & Poor had assigned the rating based on assumptions that were substantially more favourable than the actual performance of the Rembrandt notes at the relevant time.
ABN Amro and Standard & Poor contended that there was a reasonable basis for the rating and that the global financial crisis was the real and effective cause of the loss. In the alternative, they contended the disclaimers in the credit rating report expressly excluded the Councils from...
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