Australian Court Upholds Landmark S&P Derivatives Case

Standard & Poor's was found liable Friday for investment losses incurred by Australian councils in the lead-up to the global financial crisis, after a court dismissed its appeal against a landmark 2012 ruling.

The full bench of the Federal Court of Australia threw out the appeal by the ratings agency, ABN AMRO Bank and Australian firm Local Government Financial Services (LGFS) and upheld the original judgement.

The Sydney court ruled that S&P, ABN AMRO -- now a division of Royal Bank of Scotland -- and LGFS were 100 percent liable for losses sustained by the councils of 13 towns rather than 33 percent in the earlier judgement.

The 474-page decision said "S&P's rating of the Rembrandt notes was unreasonable, unjustified and misleading (and ABN AMRO knew that to be so)".

S&P said in a statement that it was "disappointed".

"It's clear that the law in Australia relating to duty of care is at odds with well-established laws elsewhere, including in the U.S. and Europe," the ratings agency said.

"We continue to believe that it is bad policy to enforce a legal duty against a party like S&P, which has no relationship with investors who use rating opinions, yet impose no responsibility on those investors to conduct their own due diligence."

Piper Alderman, the law firm representing the councils, and Bentham IMF Australia, a publicly listed company that funds large legal claims, said in a joint statement the ruling had "significant global ramifications".

"This is a landmark decision that changes the legal landscape with regard to apportionable claims for misleading and deceptive conduct," Piper Alderman partner Amanda Banton said.

"The significance of this judgement cannot be overestimated. The implications for other claims currently in the court are enormous."

- 'A great win for investors' -

John Walker, the chief executive of Bentham IMF, which funded 12 of the councils, said the decision meant investors now had more avenues of recourse.

"This is a great win, not only for the 12 councils but for investors generally, that should once and for all puts banks and ratings agencies on notice that they will be held accountable," Walker said.

The original ruling found S&P's AAA rating of constant proportion debt obligation notes created by ABN AMRO and sold to the councils were "misleading and deceptive".

It was the first time a ratings agency faced trial over synthetic derivatives, a form of collateralised debt obligation -- a high risk product that can offer extremely high yields to investors.

The councils lost Aus$16 million (U.S.$15 million) on the so-called "Rembrandt notes" they purchased from LGFS in 2006, more than 90 percent of the original capital invested.

Piper Alderman and Bentham IMF said the councils could recover about Aus$25 million, which includes interest accrued, in losses.

Friday's decision came a month after the Federal Court cleared the way for 91 church groups, councils and charities to resume a damages claim against S&P over hundreds of millions of dollars they lost on synthetic derivatives.

Last year S&P, fellow ratings agency Moody's and investment bank Morgan Stanley reached agreements to settle two lawsuits from King County in the U.S. state of Washington and Abu Dhabi Commercial Bank on accusations they hid the risk of "subprime" mortgage investments to customers.

S&P is also facing a U.S.$5 billion lawsuit filed by the U.S. government for exaggerating mortgage bond ratings in 2007.