Australian court blames ABN AMRO, S&P for investment losses

An Australian federal court judge on Monday found Standard and Poor's and ABN AMRO's investment bank liable for losses sustained by 13 local councils in the run-up to the global financial crisis on financial securities put together by ABN AMRO and rated AAA by S&P.

Judge Jayne Jagot, in a summary of her ruling on Bathurst Regional Council vs. Local Government Financial Services Pty. Ltd., found that both S&P and ABN AMRO engaged in “misleading and deceptive conduct” in engineering a top-quality AAA rating for “constant proportion debt obligation” securities sold as investments to the local councils in 2006.

By way of example, the judge noted that ABN AMRO, in engaging S&P to rate its CPDO, had argued that average volatility since inception for a key input of the financial instrument's credit rating — the Globoxx index, a 50/50 combination of the CDX and iTraxx credit default swap indexes — was 15%, when the actual figure was closer to 28% or 29%. S&P acceptance of the 15% figure failed to meet the standards of a “reasonably competent ratings agency,” the judge wrote.

When the councils cashed out of those investments by October 2008, they got back less than 10% of the principal invested, the judge's summary noted.

A separate news release by Piper Alderman, the Sydney-based law firm representing 12 of the 13 local councils, predicted Monday's ruling will pave the way for its clients to recover combined losses of just less than A$15 million (US$15.5 million) on their CPDO investments.

In an e-mail, S&P said it was disappointed with the court's decision and would appeal. “We reject any suggestion our opinions were inappropriate,” the statement said.

An ABN AMRO spokesman wasn't immediately prepared to issue a statement about the ruling.

In a telephone interview, Amanda Banton, a partner with Piper Alderman, called Monday's judgment a major step toward making ratings agencies “accountable to investors” for their opinions, effectively making it harder for those agencies to “absolve themselves from liability.”

Ms. Banton conceded the ripple effects of the ruling in Australia could be bigger in Europe, where the question of rating agency liability hasn't been thoroughly litigated, than in the U.S.