'Risky' ratings could prompt global law suits

By James Barnes

06 November 2012 at 12:16 BST

Australia's Federal Court yesterday ruled that an AAA rating of a complex financial product made by Standard & Poor was 'misleading', opening up the possibility of agencies being sued by investors who lost money in the financial crisis.

'Grotesquely complicated' product given top rating

The court slated the New York firm for failing to care for its investors, giving the top rating to ‘grotesquely complicated’ and risky synthetic derivatives known as constant proportion debt obligations (CPDOs), created by Dutch bank ABN Amro, reports Australian web site Lawyers Weekly.

Failed investments

According to the report, Justice Jayne Jagot found in favour of 12 New South Wales local councils that lost millions on failed investments.
Amanda Banton, a Sydney-based partner at Piper Alderman who represented the councils, said that the level assigned to the CPDOs was ‘clearly inappropriate’.
John Walker, the executive director of legal claims funder IMF Australia which provided litigation funding for the case, said that the landmark ruling could trigger lawsuits worldwide.
‘We expect that investors, banks and regulatory authorities around the world will be examining this judgment carefully to determine the broader implications.’ Standard & Poor’s said it plans to appeal the decision.

'Make or break'

US firm Brown Rudnick is one firm which is speaking to a number of investors interested in pursuing similar claims in England, the US and possibly the Netherlands. London partner Steven Friel said that some movement was 'likely in the short term, largely because of the six year limitation period that applies in most legal systems. A lot has been said about how difficult it is to succeed in English litigation against the rating agencies and the banks in these types of mis-selling cases, but we are soon reaching a stage where limitation will bar claims, so those investors who have adopted a 'wait and see' approach over the last few years will soon have a 'make or break' decision.'


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