Australia: Standard & Poor’s Faces Lawsuit Over Bogus Ratings
March 9th, 2010
Via: The Age:
THE credibility of ratings agency Standard & Poor’s has come under legal attack in a $40 million action by a local government superannuation investor over a AAA-rated debt investment that subsequently turned toxic in the financial crisis.
S&P has been challenged to defend the rating it subscribed to ”constant proportion debt obligation” notes – called Rembrandt – that were created by investment bank ABN Amro and bought by Local Government Financial Services, which sold them to district councils.
In a counter-claim lodged in the Federal Court last week in response to legal action taken against it by 12 NSW councils, LGFS has alleged S&P breached the Corporations Act by giving the Rembrandt notes the status of a top-rated bond.
LGFS bought $45 million worth of the notes between November 2006 and January 2007, of which $18.5 million was offloaded to local authorities such as Bathurst, Parkes, Orange, Eurobodalla and Ryde in Sydney.
They are now suing LGFS for the return of the money after the value of the notes fell dramatically and ended up returning just 6.6 per cent of their original purchase price.
LGFS, in its action against ABN Amro and McGraw-Hill International (the owners of S&P), has claimed:
* S&P was negligent in assigning its highest rating to an investment whose risk of default was far higher than a AAA-rated bond.
* S&P disregarded or inadequately considered the risks involved in its credit checks.
* Its financial modelling was not sufficiently rigorous.
Little more than a year after it bought its last block of the notes – and as the GFC was sending debt markets into free fall – S&P downgraded its rating of their value to BBB, one of its lowest grades.
Research Credit: SW
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