Ratings agency Standard & Poors will face another round of litigation worth hundreds of millions from councils who lost millions on toxic products given positive credit ratings just prior to the global financial crisis.
The Federal Court in Sydney this morning has given the green light to at least two councils, the City of Swan and Moree Plains Shire Council, to sue S&P over strong ratings it gave to complex financial products called Synthetic Collateralised Debt Obligations (SCDOs).
The councils invested in the products that were provided by the failed American investment bank Lehman Brothers, with the complex SCDOs sometimes given coveted AAA ratings by S&P.
As a result of the investments the councils lost around $250 million, and had previously successfully sued Lehman Brothers liquidators for its losses.
S&P had argued that another case against it had no reasonable prospect of success and should not be allowed to run as it should have been named as a party in the original litigation against Lehman Brothers. It also argued the Australian court had no jurisdiction to hear the case.
However in a stinging judgment this morning Justice Steven Rares found that S&P was attempting to “have its cake and eat it too” and there was no reason the ratings agency could not be sued for the losses in Australian.
“Although the corporate location of S&P is physically in the United States, the ratings that it promulgates were provided to Swan, Moree and others in this jurisdiction. It is part of S & P’s ordinary business to publish ratings that will be provided to investors who are considering investing in the products that it rates and to others in Australia, and indeed, throughout the world,” Justice Rares said.
“I am of opinion that, here, S&P has tried to have its cake and eat it. It has attacked the merits of the originating application and statement of claim at a fundamental level in the course of its seeking to have service on it set aside.”
The decision follows an earlier landmark judgment by the federal court in November 2012 which found S&P and issuing banks ABN Amro (Royal Bank of Scotland) liable for issuing CPDOs to 13 councils worth $30m.
The federal court of appeal is currently considering an appeal lodged by S&P over the earlier finding.
Solicitor Amanda Banton, partner at Piper Alderman who led the litigation on behalf of the two councils, said that she was pleased the case could finally proceed, and was hoping to recover up to $125m from S&P.
“We are pleased that this case can now proceed and is no longer tied up in legal wrangling,” she said.
The finding also has implications for the ratings of over $1.4 trillion of more commonly issued financial products called Collateralised Debt Obligations (CDOs) sold by banks and rated by S&P and other ratings agencies worldwide, which lost billions for investors in the global financial crisis.