Local Government Financial Services (LGFS) has commenced legal action against the credit ratings arm of Standard & Poor’s (S&P) and ABN Amro Holdings over the ratings and design of complex financial instruments that lost 90 per cent of their value amid the financial crisis.
LGFS has lodged a claim in the Federal Court seeking $15.5 million in compensation from S&P and ABN Amro on its investment in the Rembrandt constant proportion debt obligations (CPDO) series.
Rembrandt was a highly-leveraged synthetic floating rate note created by ABN Amro, which rebranded as Royal Bank of Scotland (RBS) in March 2009.
“What we are doing is taking legal action against S&P and ABN Amro regarding the construction of the Rembrandt CPDOs,” LGFS chief executive Peter Lambert told InvestorDaily.
“Firstly, against ABN Amro, we allege that there was a deficiency in the product’s design. Secondly, we allege that S&P was negligent in its assignment of a AAA rating on Rembrandt as it inadequately considered the product’s inherent risks.”
LGFS’s lawsuit against S&P and RBS follows legal action taken by a group of New South Wales councils against LGFS over the marketing of Rembrandt CPDOs.
The municipalities, led by Corowa Shire Council and Parkes Shire Council, lodged legal proceedings in the Federal Court in October 2009 over losses of about 90 cents in the dollar, excluding transaction costs, on their total $14.5 million investment in Rembrandt CPDOs.
The municipalities were seeking full recovery of their funds, Parkes general manager Alan McCormack said at the time.
“LGFS operated as sole distributor of the notes for which it would have earned considerable fees from the arranger, ABN Amro, for acting in that capacity,” documents filed to the Federal Court said.
About $45 million of Rembrandt was placed with LGFS, which sold around $18.5 million to municipalities as Rembrandt 2006-2 and Community Income CPDO Notes, according to the documents. LGFS kept any unsold notes as an investment within its own balance sheet.
Lambert said LGFS was also considering launching a cross-claim against S&P and RBS, seeking indemnification for the claims made against LGFS arising from the sale of Rembrandt notes to the councils.
S&P declined to comment. An RBS spokesperson said: “We cannot comment on legal matters before the courts, however we can confirm that RBS will vigorously defend the cross-claim.”
