IMF taking toxic products fight to Europe
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."
Frequently Asked Questions about this Article…
IMF has set up a foundation in the Netherlands called Ratings Redress to run a European lawsuit aimed at at least $400 million. The funder is approaching European pension funds and banks to assign their claims so the foundation — financed by IMF — can pursue defendants such as RBS and Standard & Poor's on behalf of clients.
IMF is targeting the Royal Bank of Scotland (RBS) — which now owns a former ABN AMRO subsidiary that sold the products — and the ratings agency Standard & Poor's. The action follows an Australian Federal Court finding that S&P’s AAA rating of the 2006 ‘Rembrandt’ CPDOs was misleading and deceptive.
CPDOs, such as the Rembrandt series issued in 2006, are structured credit products. According to the article, these CPDOs were tied to two credit default swap indices and their value plunged as the global financial crisis unfolded in early 2008. An Australian judge found S&P’s AAA rating of the Rembrandt CPDOs to be misleading and that the products were ‘grotesquely complicated’ and could not reasonably have been rated AAA.
Yes — Ratings Redress, set up in The Hague, has characteristics of both a company and a trust and is described as the Dutch equivalent of a class action. European clients would assign their rights to the foundation, IMF would fund it, and the foundation would bring the legal action on behalf of all assignors.
IMF estimates the European action at a minimum of about $400 million and says it will proceed with hundreds of millions of dollars while looking for more claims. In Australia, councils that bought the Rembrandt CPDOs are seeking roughly $30 million from various parties, including S&P and the former ABN AMRO subsidiary.
Standard & Poor's has indicated it plans to appeal the Australian Federal Court judge Jayne Jagot’s ruling that the Rembrandt CPDOs’ AAA rating was misleading and deceptive.
The article says IMF has begun talks with potential clients among Europe’s pension funds and banks. Investors or institutions that bought CPDOs sold in 2006–2007 — for example products sold by ABN AMRO’s business that is now part of RBS — could be affected or eligible to assign claims to the Ratings Redress foundation.
According to IMF’s Dutch legal advice cited in the article, there is a six-year limitation period in Europe. The advice says the limitation runs from when a client discovers that they were wronged, so discovery date is key to determining whether a claim is still within the six-year period.
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