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Councils 'not told' of risks

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.

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 worth of a product called Rembrandt notes from the investment bank ABN AMRO for on-sale 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 LGFS executives who reported to him.

"You knew [the flyer] only provided an outline of the positive features, correct?" Mr Jackman asked.

"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.

His paper attributed the loss to the impact on the notes of the subprime mortgage crisis in the United States.

Narromine Shire Council and City of Ryde Council bought some of the notes from LGFS on June 27.

Asked if he took any steps to ensure they were told about the problems in the United States, 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?"

Mr Hilder replied: "There was no such strategy."

Thirteen councils are suing LGFS, ABN and Standard & Poor's, which assigned an AAA rating to the Rembrandt notes.


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