LOCAL councils that lost money on structured finance products could not sue the company they bought them from for breach of fiduciary duty simply because they trusted it, the Federal Court heard yesterday.
Local Government Financial Services Pty Ltd sold 13 councils constant proportion debt obligations marketed as Rembrandt notes, which were created by the investment bank ABN Amro and assigned a AAA rating by the credit rating agency Standard & Poor's.
Yesterday Guy Parker, SC, for LGFS, said the councils could not succeed in a fiduciary duty claim because "there just was no relationship of trust and confidence in the relevant sense".
Mr Parker said trust played a role in any business that set out to have good customer service to attract repeat sales.
"If I go down to Woolworths and buy something off the shelf, I suppose I am trusting Woolworths to have got it to the shop in the appropriate condition and I suppose it might be said that, in some way, I am depending on Woolworths having done so," he said.
"That doesn't mean it's a fiduciary relationship."
In its dealings with Bathurst Regional Council, there was no objective basis to say that "LGFS had to subordinate its own interests to Bathurst's," he said.
The 13 councils lost $16 million, or 93 per cent of the capital they invested Rembrandt notes in 2006.
They are suing LGFS, a subsidiary of the NSW Local Government Superannuation Scheme, as well ABN Amro and Standard & Poor's.
Their claims include negligence and misleading or deceptive conduct.
LGFS, which retained $26 million worth of Rembrandt notes on its own books, is also suing the bank and the agency.
Mr Parker said no one at ABN had the job of saying "even if we can persuade S&P to issue a AAA rating, will it be a AAA rating that reflects reality and is justified?"
"Once they were going to manufacture this product for sale subject to a AAA rating, we submit they owed us a duty to conduct themselves to ensure that the product didn't hit the market unless it truly did justify its AAA rating," he said.
Closing submissions continue today.
Frequently Asked Questions about this Article…
What were Rembrandt notes and how were they described in the case?
Rembrandt notes were structured finance products sold to local councils and described in the hearing as constant proportion debt obligations (CPDOs). The notes were created by the investment bank ABN Amro and marketed under the Rembrandt name.
Who sold the Rembrandt notes to the councils?
Local Government Financial Services Pty Ltd (LGFS) sold the Rembrandt notes to 13 councils. LGFS is a subsidiary of the NSW Local Government Superannuation Scheme.
Which organisations are the councils suing over the Rembrandt notes losses?
The 13 councils have sued LGFS, ABN Amro (the bank that created the notes), and the credit rating agency Standard & Poor's.
How much did the councils lose investing in Rembrandt notes and when did the losses occur?
The councils collectively lost $16 million, which the article states was 93% of the capital they invested in Rembrandt notes in 2006.
What legal claims have the councils made against the sellers and creators of the notes?
Their claims include negligence and misleading or deceptive conduct. They also pursued a breach of fiduciary duty claim, which was discussed in the Federal Court hearing.
Why did LGFS argue it did not owe the councils a fiduciary duty?
LGFS counsel Guy Parker, SC, told the court there was no special relationship of trust and confidence in the legal sense, arguing ordinary commercial trust (for example, expecting a shop to supply goods in proper condition) does not automatically create a fiduciary relationship.
Did LGFS hold any Rembrandt notes itself, and is it taking action too?
Yes. The article says LGFS retained $26 million worth of Rembrandt notes on its own books and is also suing ABN Amro and Standard & Poor's.
What was said about responsibility for the AAA rating on the Rembrandt notes?
Counsel argued that no one at ABN Amro had the specific role of asking whether a AAA rating from Standard & Poor's truly reflected reality, and submitted that once ABN Amro manufactured a product for sale subject to a AAA rating it owed a duty to ensure the product legitimately justified that rating. Closing submissions were continuing.
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