Moree beats Wall Street in law suit
They are the Australian councils, charities and church groups who took on the might of Wall Street — and won. Among them was tiny Moree Council, representing a population of under 10,000.
“You don’t stuff with bush people,” said a jubilant Moree Mayor Katrina Humphries yesterday after the Moree council and its fellow litigants finalised a settlement believed to be worth more than $100 million with the world’s leading ratings agency, Standard & Poor’s, over financial losses sustained during the global financial crisis.
The 90 Aussie groups lost almost $300m on toxic securities peddled by failed investment bank Lehman Brothers and given the tick of approval by Standard & Poor’s. But after a six-year legal battle they have come out on top. Combined with the previous win over the Lehman Brothers liquidator, the group as a whole could get a payout of more than what they lost, when interest is calculated. Moree Plains Shire Council was the lead plaintiff in the lawsuit.
Ms Humphries had a blunt message yesterday for the ratings agencies and merchant banks who lost them millions. “It might be a surprise to city people, even New York City people, that we fought and won this but we were determined to fight day and night and we’ve been doing it for years,” she said.
Their investments were made in the fiendishly complex financial products that fuelled the toxic fire of the GFC. Collateralised debt obligations were sold by Lehman Brothers between 2004 and 2005 and received Standard & Poor’s AAA rating. In a twist, CDOs were the securities largely responsible for the collapse of the 158-year-old company in 2008.
After they lost hundreds of millions of dollars in the GFC, the groups pursued both the liquidators of the failed Lehman Brothers and S&P in the Federal Court, claiming they would not have invested in the CDOs if not for the high ratings given to them by S&P.
Pressure from Australian councils forced a world-first Federal Court ruling in 2012 that found S&P could be liable for the ratings it gave the toxic financial products.
In December last year, Lehman’s Australian liquidators were able to unlock about $500m to provide to Australian creditors, providing about 80c in the dollar to the Australian group of councils and charities.
The epic legal journey spanning over six years between the High Court, Federal Court and US courts has cumulated in the settlement with S&P. In 2008, Ms Humphries said, the case against Lehman and S&P was “the first thing to come across (her) desk”. A council team led by corporate services director Mitchell Johnson worked “day and night” on the issue for six years.
“It does show that sometimes good does conquer evil, and I believe what was happening here was evil,” she said yesterday.
Ms Humphries says that despite the healthy settlement she was still not expecting a 100 per cent return of Moree’s exposure of about $7m to the toxic products and doesn’t regard the outcome as “a win”, given the expense and cost to the council.
“Anything we get back is good and it’s a lot more than we thought we would get initially,” she said. “I just could not let them get away with it.”
Ms Humphries says that despite the fact legal funders IMF and lawyers are taking a hefty fee, the return is much greater than the 6c in the dollar the group was originally told they would get. “We haven’t got a figure on it yet, but we are looking at between 70-80 per cent minus legal fees,” she said. “It’s a fair hit with the legal fees but they were risking taking a fair hit. It does give you confidence in the legal system though.”
The case was one of several run by solicitor Amanda Banton of Squire Patton Boggs against the ratings agency and Lehman Brothers. While not commenting on the settlement terms or amount yesterday, Ms Banton said it highlighted that “organisations such as Standard & Poor’s require transparency and accountability in the formulation of the credit ratings they assign to financial products such as SCDOs (synthetic collateralised debt obligations)”.
“Our clients based their conservative purchase decisions on the fact that the credit ratings assigned by the ratings agency were objective, independent and uninfluenced by any conflicts of interest that might compromise Standard & Poor’s analytical judgment and reflected its true current opinion of the credit risks SCDOs posed to investors,” Ms Banton said.
Ms Humphries said she wouldn’t be popping champagne corks until the settlement was finalised. “I’m very, very cautious,” she said. “I will not be opening a bottle of champagne till that money is in our account.”
Mick Wainwright, Mayor of Western Australia’s City of Swan, said the agreement vindicated the “lengthy international pursuit” of Lehman and S&P. “As one of the few Australian local governments prepared to stand up to these international giants of the finance sector, we hope this settlement will finally see the conclusion of this eight-year saga,” Mr Wainwright said.
In a statement to the Australian Securities Exchange yesterday, IMF said the settlement was a “significant step” in the settlement of the class action and final distribution of the Lehman funds.
Source: Leo Shanahan, The Australian.