THE company that sold a novel structured finance product to local councils in 2006 produced a two-page flyer that described the positive features but did not set out the risks, the Federal Court heard yesterday.
Local Government Financial Services Pty Ltd bought $49 million of a product called Rembrandt notes from the investment bank ABN AMRO for onsale to local councils.
Yesterday the former head of LGFS Warwick Hilder denied there was "a strategy of keeping councils in the dark" at his company, which was owned by the Local Government and Shires Association until 2004, when it was bought by the Local Government Superannuation Scheme.
Mr Hilder was cross-examined by ABN's barrister, Ian Jackman, SC, about discrepancies between a presentation about the notes by ABN to LGFS, and the information LGFS passed on to its council clients.
"Your understanding of LGFS's marketing of the Rembrandt notes was that councils were not going to be given any document that set out all the risks that ABN had identified to you in relation to that product, correct?" Mr Jackman asked.
"Correct," Mr Hilder replied.
A two-page flyer he wrote about the Rembrandt notes was intended to be an "agenda for discussion" during face-to-face conversations with council officers, he said. The direct contact with councils was not made by Mr Hilder, but by two executives who reported to him.
"You knew [the flyer] only provided an outline of the positive features, correct?" Mr Jackman told the court. "I was trying to describe the transaction, I was not trying to set out the risks," Mr Hilder replied.
He agreed that "on its own" the flyer did not provide a true picture of the product.
Mr Jackman referred to a paper Mr Hilder prepared for the LGFS board in June 2007, saying that LGFS was going to write down the value of its own holding of Rembrandt notes by $500,000 in its annual accounts.
It attributed the loss to the impact of the sub-prime mortgage crisis in the US on the notes.
Narromine Shire Council and City of Ryde Council bought some of the notes from LGFS on June 26. Asked if he took steps to ensure they were told about the problems in the US, Mr Hilder said: "I had nothing to do with the councils on the individual transactions."
Mr Jackman asked: "It was consistent with your company's marketing strategy of keeping the councils in the dark about the risks of investing in Rembrandt notes?"
"There was no such strategy," Mr Hilder replied.
Thirteen councils are suing LGFS, ABN (now owned by Royal Bank of Scotland) and Standard & Poor's, the credit rating agency that assigned an AAA rating to the Rembrandt notes.
Frequently Asked Questions about this Article…
What were Rembrandt notes and who sold them to local councils?
Rembrandt notes were a novel structured finance product sold to local councils. Investment bank ABN AMRO sold the notes to Local Government Financial Services (LGFS), which bought about $49 million of the product for on‑sale to councils.
Did LGFS fully disclose the risks of Rembrandt notes to council investors?
No. LGFS used a two‑page flyer that described the positive features and served as an agenda for face‑to‑face discussions, but the flyer did not set out the full range of risks ABN AMRO had identified. LGFS’s former head, Warwick Hilder, agreed the flyer on its own did not provide a true picture of the product.
Who marketed Rembrandt notes directly to councils?
Direct contact with councils was made by two LGFS executives who reported to Warwick Hilder. Hilder said he prepared the flyer and oversaw LGFS but did not personally handle the individual council transactions.
Were the Rembrandt notes affected by the US sub‑prime mortgage crisis?
Yes. LGFS prepared a board paper in June 2007 saying it would write down the value of its Rembrandt notes holding by $500,000 and attributed the loss to the impact of the US sub‑prime mortgage crisis on the notes.
Are there lawsuits connected to the sale of Rembrandt notes to councils?
Yes. Thirteen councils have sued LGFS, ABN (noted in the article as now owned by the Royal Bank of Scotland) and credit rating agency Standard & Poor’s over the Rembrandt notes.
What was Warwick Hilder’s position when questioned about keeping councils ‘in the dark’?
In Federal Court testimony, Warwick Hilder denied there was any strategy at LGFS to keep councils ‘in the dark’ about risks. He said the flyer was intended to prompt discussion and that he was not trying to set out the risks in that document.
Which councils are known to have bought Rembrandt notes from LGFS?
The article specifically names Narromine Shire Council and the City of Ryde as councils that bought some Rembrandt notes from LGFS on June 26.
What role did Standard & Poor’s and ABN AMRO play in the Rembrandt notes matter?
Standard & Poor’s assigned an AAA credit rating to the Rembrandt notes, and ABN AMRO was the investment bank that originally sold the product to LGFS. Both ABN (now owned by the Royal Bank of Scotland) and Standard & Poor’s are defendants in the lawsuits brought by the councils.
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