Debt seller had no duty to councils, court told

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 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.