Landmark ruling by Australian court could pave way for flood of cases against ratings agencies

This article is more than 7 years old

This article is more than 7 years old

Standard & Poor's misled investors with excessive ratings for financial products which then lost almost all their value in the financial crisis, according to an Australian court ruling that could open the way for a flood of similar cases.

In a strongly worded judgment, Australian federal court judge Justice Jayne Jagot said the credit rating agency and the investment bank ABN Amro had deceived 12 local councils that bought AAA-rated notes created by the bank – AAA denotes what the agency considers the safest level of investment.

The councils were assured the so-called Rembrandt notes bought from Local Government Financial Services (LGFS) in late 2006 had a less than 1% chance of defaulting, but within six months, the councils had lost A$16m (£10.4m), or 90% of the funds they had invested.

"S&P's rating of AAA … was misleading and deceptive and involved the publication of information or statements false in material particulars and otherwise involved negligent mispresentations to the class of potential investors in Australia," Jagot said.

She added: "ABN Amro was knowingly concerned in S&P's contraventions of the various statutory provisions proscribing such a misleading and deceptive conduct."

Jagot's 1,459-page ruling awarded the 12 councils in New South Wales roughly A$30m in total for losses and damages. S&P said in a statement: "We reject any suggestion our opinions were inappropriate and we will appeal the Australian ruling, which relates to a specific rating."

RBS, the British bank which bought ABN Amro in a disastrous takeover in 2007, said in a statement it was "studying this long and complex judgment". RBS shares were down 1.7 %.

The case marks the first time a ratings agency has been brought to book by a court anywhere in the world over the complex financial products widely cited as one of the factors that triggered the crisis.

The repackaging of debt into securities with top ratings from S&P and other rating firms contributed to more than £1.25 trillion in losses and writedowns when Lehman Brothers collapsed in 2008.

Lawyers said the ruling could set a precedent for future action.

"This is a major blow to the ratings agencies, which for years have had the benefit of profiting from the assignment of these ratings without ever being accountable to investors for those opinions," said lawyer Amanda Banton, who represented the councils.

The claimants welcomed the ruling. General manager at Bathurst Regional Council Dave Sherley told the Sydney Morning Herald that the council was pleased with the outcome and that its staff rely on financial advisers and rating agencies to have the skills they lack.

"This judgment will ultimately have the effect of ensuring ratings agencies are accountable and promoting transparency in the ratings process," he said.

The claim, concerning constant proportion debt obligations (CPDOs) sold in 2006, was financed by IMF Australia, a publicly listed company that funds large class-action lawsuits and which is also planning legal action in Amsterdam related to some €2bn (£1.6bn) in CPDOs sold by ABN Amro and rated by S&P.

It follows a judgment in September against Lehman Brothers Australia, which found that firm breached its legal duties when it sold collateralised debt obligations (CDOs) to a group of charities, councils and churches that collectively lost A$250m.

Rating agencies are under scrutiny globally. The European commission wants to reform the sector, dominated by Standard & Poor's, Moody's and Fitch. The internal market commissioner, Michel Barnier, said ratings agencies should follow stricter rules, be more transparent about their ratings and be held accountable for their mistakes.