In Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200 the Federal Court of Australia has allowed claims by 13 local councils which had lost over $16M when they purchased through Local Government Financial Services Pty Ltd a structured financial product known as a constant proportion debt obligation or CPDO from ABN Amro rated AAA by Standard & Poor’s.

UPDATE 14 March 2013: The decision on damages, interest and costs

Judge Jagot decided that:

• S&P’s rating of AAA of the Rembrandt 2006-2 and 2006-3 CPDO notes was misleading and deceptive and involved the publication of information or statements false in material particulars and otherwise involved negligent misrepresentations to the class of potential investors in Australia, which included LGFS and the councils, because by the AAA rating there was conveyed a representation that in S&P’s opinion the capacity of the notes to meet all financial obligations was “extremely strong” and a representation that S&P had reached this opinion based on reasonable grounds and as the result of an exercise of reasonable care when neither was true and S&P also knew not to be true at the time made;
• ABN Amro was knowingly concerned in S&P’s contraventions of the various statutory provisions proscribing such misleading and deceptive conduct, and also itself engaged in conduct that was misleading and deceptive and published information or statements false in material particulars and otherwise involved negligent misrepresentations to LGFS specifically and the class of potential investors with which ABN Amro knew LGFS intended to deal, being the councils, by reason of ABN Amro’s deployment of the AAA rating and its own representations as to the meaning and reliability of the AAA rating which also were not true and ABN Amro knew not to be true at the time made;
• ABN Amro also breached its contract with LGFS under which ABN Amro was to model and structure the transaction by which LGFS would purchase the Rembrandt 2006-3 CPDO notes having a rating assigned by S&P of AAA; and
• LGFS engaged in misleading and deceptive conduct and in one respect the publication of an information or statement false in material particulars and otherwise made negligent misrepresentations to the councils about the Rembrandt 2006-3 CPDO notes and, in addition, breached its Australian financial services licence in advising the councils about and selling to them the notes because the notes were not a debenture and thus not a security but a derivative under the Corporations Act in which LGFS was not licensed to deal and otherwise
  breached its fiduciary duties to each of the councils.

Judge Jagot rejected the arguments made by LGFS, S&P and ABN Amro of contributory negligence or the equivalent by the councils and ordered they were each proportionally liable to the councils as to 33⅓% each for the difference between the principal amount each council paid and the payment they received on the cash-out of the notes.

She He also made orders as to the entitlements of S&P, ABN Amro and LGFS in cross-claims they made against each other and LGFS’s claim for indemnity under the contract of insurance between FuturePlus and American Home Assurance Company.