Bank, S & P face toxic products lawsuit
LITIGATION funder IMF is to pursue Royal Bank of Scotland and ratings agency Standard & Poor's over toxic financial products in a European lawsuit estimated to be worth at least $400 million.
IMF last Wednesday set up a foundation in the Netherlands to run the legal action and has already begun talks with potential clients among European pension funds and banks.
The mooted European lawsuit builds upon a judgment delivered last month by the Federal Court's Justice Jayne Jagot, who found in favour of councils that bought what she described as "grotesquely complicated" financial instruments that were given the highest possible rating, AAA, by Standard & Poor's.
A final order is yet to be entered but the councils are seeking about $30 million from parties including Standard & Poor's and a former ABN AMRO subsidiary, now owned by RBS, that sold the products.
Justice Jagot found Standard & Poor's rating of the "Rembrandt" series of constant proportion debt obligation (CPDO) products issued in 2006 was misleading and deceptive, and the product "could not have been rated AAA by S&P on any rational or reasonable basis".
Standard & Poor's has indicated it plans to appeal the ruling.
IMF managing director Hugh McLernon said that in addition to pursuing RBS and Standard & Poor's in Europe, the litigation funder would also be "examining the CPDOs issued by other investment banks".
He said European clients would assign their right to pursue RBS and Standard & Poor's to IMF's new foundation, Ratings Redress, based in The Hague.
The foundation structure has characteristics of both a company and a trust, and was "the Dutch equivalent of a class action", he said.
"Rather than each of them [clients] taking their own action, they assign their claims to the foundation, we fund the foundation, and the foundation takes the legal action."
ABN AMRO sold the CPDO product in 2006 and 2007, but the value of the products, which was based on two credit default swap indexes, plunged as the global financial crisis hit in early 2008.
Mr McLernon said that in Europe there was a six-year time limit to bring legal action.
"Our Dutch legal advice is that the limitation period runs from when you discover that wrong has been done to you," he said.
He said IMF hoped to be able to announce clients had been signed up to the foundation in short order.
"We'll proceed with hundreds of millions of dollars, but we're looking for much more than that.
"One, we've got the verdict. Two, we understand the product.
"We've got the funds and we've got the appetite for a fight.
"So we'll either succeed or go down in a reasonably interesting fashion."