InvestSMART

Council relied on adviser in $2m notes purchase

THE Cooma-Monaro Shire Council relied more on its investment adviser than on the credit rating assigned to financial products, its former finance manager told the Federal Court yesterday.

THE Cooma-Monaro Shire Council relied more on its investment adviser than on the credit rating assigned to financial products, its former finance manager told the Federal Court yesterday.

Katherine Monaghan said she relied "first and foremost" on Simon Michell, an adviser employed by Local Government Financial Services, a subsidiary of the NSW local government superannuation scheme.

Ms Monaghan said Mr Michell advised her in 2007 that a structured finance product called Rembrandt Notes was "as risk averse" as an Esanda debenture held by the council which was soon to mature.

She was aware at the time that Rembrandt Notes had a higher rating than the debenture.

"And you took that into account in deciding whether to act on the recommendation that had been made?" the barrister for LGFS, Guy Parker, SC, asked.

"To a lesser extent I first and foremost relied on Simon's advice," Ms Monaghan replied.

Cooma-Monaro Shire Council invested $2 million in Rembrandt Notes in May 2007, on which it lost $1.86 million 18 months later.

Thirteen councils that lost a combined $16 million are suing LGFS, ABN AMRO, the investment bank that arranged the notes, and the agency that assigned them a AAA credit rating, Standard & Poor's.

S&P's barrister, Steven Finch, SC, asked whether Ms Monaghan equated Mr Michell's comparison of the two products only to their ratings or "something wider".

Ms Monaghan said something wider, because she knew a debenture was "a high-order debt that would be repaid as one of [Esanda's] first repayments if they came to be liquidated or bankrupted and I considered therefore, considering that they were an entity owned by ANZ as well, that that investment was extremely safe".

"I take it that means that if you found out or were told that the Rembrandt investment had exactly the same rating as Esanda, that would not have made any difference to your decision-making process because of the other factors you have just mentioned?" Mr Finch asked.

"That's correct," Ms Monaghan replied.

She did not agree with Mr Finch that the rating was not a crucial factor "but it was only one factor".

The court was shown an email Ms Monaghan wrote to other council officers in April 2008 which said: "I made some incorrect assumptions about this product and I am prepared to take responsibility for that. I didn't ask all the right questions because I trusted the investment advice I was receiving too blindly."

Ms Monaghan said that although she knew before investing that the council could lose money on the Rembrandt Notes, she didn't know many of their features.

She didn't know they were leveraged or that their return depended on movements in credit default swap indices and had "no idea" under what circumstances the council could lose its investment.

The council would not have bought the notes if she had known then what she knew now, she said.

The case continues.


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