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.
Frequently Asked Questions about this Article…
What were Rembrandt notes and who sold them to local councils?
Rembrandt notes were described in the article as a novel structured finance product sold in 2006. Local Government Financial Services (LGFS) bought about $49 million worth of the notes from investment bank ABN AMRO for on-sale to local councils.
Did the LGFS flyer about Rembrandt notes explain the risks to councils?
No. The two-page flyer LGFS used outlined the positive features and was intended as an agenda for face-to-face discussion, but it did not set out the full range of risks. LGFS’s former head Warwick Hilder agreed the flyer on its own did not provide a true picture of the product’s risks.
Who is Warwick Hilder and what did he say in the Federal Court hearing?
Warwick Hilder is the former head of LGFS. In cross-examination he denied there was any strategy to keep councils in the dark about risks, said the flyer was meant to prompt discussion, and stated he personally had nothing to do with the individual council transactions (which were handled by two LGFS executives).
Were councils told about the impact of the US subprime mortgage problems on Rembrandt notes?
The article indicates that LGFS later attributed a fall in value of its Rembrandt holding to the US subprime mortgage crisis and planned a $500,000 write-down in 2007. When asked in court if he had told councils about US problems, Warwick Hilder said he had nothing to do with the individual council transactions, suggesting councils may not have been directly informed by him.
Did LGFS record losses on its Rembrandt notes holding?
Yes. A paper prepared by Warwick Hilder for the LGFS board in June 2007 noted that LGFS was going to write down the value of its own holding of Rembrandt notes by $500,000, attributing the loss to the subprime mortgage crisis in the United States.
Which councils are known to have bought Rembrandt notes from LGFS?
The article names Narromine Shire Council and the City of Ryde Council as having bought some of the Rembrandt notes from LGFS on June 27.
Are there lawsuits connected to the Rembrandt notes sales to councils?
Yes. Thirteen councils are suing LGFS, ABN AMRO and Standard & Poor’s in relation to the Rembrandt notes, according to the article.
What role did Standard & Poor’s play in the Rembrandt notes issue?
Standard & Poor’s assigned an AAA rating to the Rembrandt notes, and the rating agency is one of the parties named in the lawsuits brought by the thirteen councils.
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