Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq) [2012] FCA 1028
Overview
This afternoon the Federal Court handed down its decision in a class action brought by three Councils (as the representative applicants) against Lehman Brothers (formerly Grange Securities Limited).
Background
The claims concerned investment advice and decisions of Grange concerning synthetic collateralised debt obligations and other complex financial products (“SCDOs”). At the time of their acquisition by or on behalf of the Councils, the relevant SCDOs had credit ratings between AAA and AA-.
Decision
Rares J has held that, in marketing the SCDOs and in providing financial advice to the Councils, Grange:
- engaged in misleading and deceptive conduct in breach of s12DA of the ASIC Act by promoting the SCDOs as suitable investments because, contrary to representations made to the Councils, the SCDOs:
- did not have a high level of security for the invested capital;
- were not easily tradeable on an established secondary market or able to be readily liquidated for cash; and
- were not suitable investments for risk averse Councils;
- was negligent in recommending that the Councils invest in the SCDOs and breached its obligations under the individual managed portfolio agreements with relevant Councils; and
- acted in breach of its fiduciary duties as a financial adviser to, and/or in making investments on behalf of, relevant Councils. This was because Grange had a conflict between its duty to give sound financial advice to, or make investment decisions on behalf of, the Councils, and an interest in fees or profits from sales of SCDOs that it did not disclose to any of the Councils.
Rares J also held a defence of “contributory negligence” was not available because:
- Grange knew that the nature and risks of SCDOs were concepts “beyond the grasp” of most people, and that the SCDOs were acquired by the Councils based on the expertise and advice offered by Grange; and
- that any carelessness by the Councils in not reading material or understanding risks did not materially contribute to the economic loss suffered; and
- that it was proper for the Councils to rely on Grange to perform its contractual obligations and tortious duty to exercise due care and skill.
As a result of the above, Rares J has held that Grange is liable to compensate the Councils for their losses incurred as a result of their investments, assessed on the basis that the Councils are entitled to:
- the amount lost in investments in SCDOs that have either been wiped out or paid less than 100 cents on the dollar at maturity or which the Councils sold at a loss;
- the difference between the par values and the values assessed by the Court of unmatured SCDOs;
- in respect of Dante notes (notes caught up in a conflict between UK and US judicial decisions), net present values based on averaging the two possible outcomes of the conflicting UK and US decisions and the substantial delay that is likely before any sum is repaid to investors.
A copy of the full decision may be found here and a copy of a summary released by the Federal Court may be found here.