Ten councils have started legal action against Local Government Superannuation Scheme-owned product provider Local Government Financial Services (LGFS) over the sale of complex financial instruments that have lost 90 per cent of their value.
The New South Wales municipalities, led by Corowa Shire Council and Parkes Shire Council, have lodged legal proceedings in the Federal Court of Australia over losing about 90 cents in the dollar, excluding transaction costs, on their total $14.5 million investment in Rembrandt constant proportion debt obligations (CPDO) 2006-3, also known as community income CPDO notes.
Rembrandt was a highly-leveraged synthetic derivative product created by financial services group ABN Amro Holdings, which rebranded as Royal Bank of Scotland (RBS) in March.
The municipalities were seeking full recovery of their funds, Parkes general manager Alan McCormack told Investor Weekly. The councils invested in Rembrandt between November 2006 and June 2007.
The councils alleged LGFS on a number of fronts was in breach of duty, breach of contract and misleading and deceptive conduct, documents filed to the Federal Court said.
"The recommendation to invest in Rembrandt, a complex synthetic credit derivative, was inconsistent with [the councils'] legislative boundaries and conservative strategy," the documents said.
The councils alleged Rembrandt letters and pamphlets emphasised in an unqualified way certain benefits of the product, without proper if any reference to the risks, according to the documents.
About $45 million worth of Rembrandt was placed with LGFS, which sold around $18.5 million to municipalities marked as Rembrandt 2006-2 and community income CPDO notes, the documents said.
While LGFS was unable to comment on the legal proceedings, it was considering indemnifying itself by including RBS in the legal proceedings, LGFS chief executive Peter Lambert said.
LGFS was also considering separate legal action against RBS in relation to the portion of around $45 million worth of Rembrandt notes that were unsold at the time the product experienced difficulties, Lambert said.
An RBS spokesperson said the group maintained its position that it would be inappropriate to hypothesise on potential legal action being taken.
