British court backs Aussie investors

Seven judges of the Supreme Court unanimously dismissed Lehman's appeal against 22 Australian investors, including superannuation funds, charities and individuals, who put $250 million into complex financial products known as synthetic collateralised debt obligations, or CDOs.

Lehman's collapse in 2008 triggered a dispute over whether the investors, or Lehman's creditors, were entitled to the collateral supporting the CDOs, marketed under the name "Dante" notes.

The collateral, in the form of bank bills with the same face value as the CDOs, is held in a London bank by the trustee, The Bank of New York Mellon.

One of the judges, Lord Robert Walker, said: "In this case the noteholders were, as a matter of substance, the only parties who contributed any real assets - in many cases the pension funds of hard-working Australian citizens. [Lehman] contributed only promises, and then proved unable to perform them."

The dispute centred on a so-called "flip" clause in the Dante notes, which the investors said changed the priority of access to the collateral in their favour when Lehman filed for bankruptcy.

Lord Lawrence Collins said the case involved "a complex commercial transaction entered into in good faith" by non-bank investors and Lehman, the designer and marketer of the notes.

"There was evidence that the fact that the noteholders would have priority over the collateral in the event of [Lehman's] insolvency was a very material factor in obtaining AAA credit ratings, which enabled Lehman to market the notes," he said.

The Johnson Winter and Slattery partner representing the noteholders, Jim Hunwick, said it was "an emphatic and welcome" victory over Lehman's "cynical attempt to invalidate its own documents".

The immediate impact of the decision is unclear because Lehman is also challenging the effect of the flip clause in the United States, where it has won several rulings and the Australian investors have lodged an appeal.

"We can expect Lehman to try anything it can to stop the trustee and the English courts from giving effect to this win," Mr Hunwick said.

A Lehman lawyer, Locke McMurray, said the decision had "no impact" on the US rulings "which remain the law of the case within the consolidated Lehman bankruptcy proceedings".

A separate group of Australian noteholders represented by Perpetual Trustee Company settled similar US and British litigation with Lehman in December.