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IMF Australia Plaintiffs Win Against Standard & Poor's
S&P Liable for "Misleading and Deceptive" AAA Ratings for the First Time
By: PR Newswire
Nov. 5, 2012 02:56 PM
NEW YORK, Nov. 5, 2012 /PRNewswire/ -- An Australian Court has become the first in the world to find a ratings agency liable for AAA ratings on junk derivatives, paving the way for many new possible claims in the United States and elsewhere.
Australia's Federal Court yesterday found against Standard & Poor's (S&P) and investment bank ABN AMRO (now Royal Bank of Scotland) in a claim brought by a handful of local government authorities that lost more than $30 million in complex securities that turned to junk when the housing market crashed.
The claim against S&P and ABN AMRO was backed by Australia's largest litigation funder IMF (Australia), parent company of US-based funder Bentham Capital.
The securities - complex synthetic derivatives known as constant proportion debt obligations, or CPDOs - were arranged by ABN AMRO, rated AAA by S&P and sold to local government authorities by an intermediary firm in 2006. Billions of dollars worth of similar securities packaged by ABN AMRO were sold to institutional investors in the US and Europe over the same period.
Bentham Capital Chief Investment Officer, Ralph Sutton, said the Australian judgment, coupled with new findings that challenge the ratings agencies' First Amendment defense, could spell trouble in US courts for Moody's and S&P, among others.
"A recent ruling from Judge Shira Scheindlin in federal court here in New York suggests the rating agencies are in serious trouble relying on an 'opinion' defense," Mr. Sutton said.
Last August, United States District Judge Shira Scheindlin denied Moody and S&P's motions for summary judgment in a similar action, holding:
In the Australian case, 12 local government authorities alleged that ABN AMRO exercised real and substantial influence over S&P's rating process in order to obtain the desired ratings for the securities, known as Rembrandt Notes (sold as Castle Finance or Chess globally). Plaintiffs also alleged that S&P negligently and misleadingly granted a AAA rating to the CPDOs when a junk bond rating would have been more appropriate.
In her judgment, Australian Federal Court Justice Jayne Jagot found, in part:
In the US, litigation finance has recently come under attack by the US Chamber of Commerce, the largest lobbying group in America. The majority of the US Chamber's funding is reported to come from just 16 large US companies. The Chamber last week proposed regulating the litigation finance industry, but would prefer to eliminate it entirely.
Litigation finance, however, is a critical mechanism to enable cases to be brought and litigated against large corporations, banks and other powerful institutions, often by small and mid-sized companies and entities.
The Australian Federal Court's finding yesterday -- in favor of local municipalities -- that S&P's AAA ratings were "misleading and deceptive" could never have been achieved without litigation funding support from IMF (Australia), Bentham's parent.
SOURCE Bentham Capital LLC
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