IMF taking toxic products fight to Europe
THE litigation funder IMF is to pursue the Royal Bank of Scotland and the ratings agency Standard & Poor's over toxic financial products in a European lawsuit that is estimated to be worth at least $400 million.
On Wednesday, IMF set up a foundation in the Netherlands to run the legal action and has begun talks with potential clients among Europe's pension funds and banks.
The mooted lawsuit builds on last month's judgment by the Australian Federal Court judge Jayne Jagot, who found in favour of councils which had bought what she described as a "grotesquely complicated" financial instruments that were given the highest possible rating, AAA, by Standard & Poor's.
A final order is yet to be entered but the councils are seeking about $30 million from various parties, including S&P and a former subsidiary of ABN AMRO, now owned by RBS, that sold the products.
Justice Jagot found S&P's rating of the "Rembrandt" series of constant proportion debt obligation (CPDO) products issued in 2006 was misleading and deceptive and the product "could not have been rated AAA by S&P on any rational or reasonable basis".
Standard & Poor's has indicated that it plans to appeal the ruling.
IMF's managing director, Hugh McLernon, said that in addition to pursuing RBS and S&P in Europe, the firm would also be "examining the CPDOs issued by other investment banks".
He said European clients would assign their right to pursue RBS and S&P to IMF's foundation, Ratings Redress, in The Hague.
The foundation's structure has characteristics of both a company and a trust and was "the Dutch equivalent of a class action", he said.
"Rather than each of them [clients] taking their own action, they assign their claims to the foundation, we fund the foundation, and the foundation takes the legal action," he said.
ABN AMRO sold the CPDO product in 2006 and 2007 but the value of the products, which was based on two credit default swap indices, plunged as the global financial crisis arose in early 2008.
Mr McLernon said that in Europe there was a six-year time limit to bring legal action.
"Our Dutch legal advice is that the limitation period runs from when you discover that wrong has been done to you," he said.
Mr McLernon said IMF hoped to be able to announce that clients had been signed up to the foundation soon. "We'll proceed with hundreds of millions of dollars but we're looking for much more than that.
"One, we've got the verdict. Two, we understand the product. We've got the funds and we've got the appetite for a fight. So we'll either succeed or go down in a reasonably interesting fashion."