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Three Australian councils on Friday won their case against a Lehman Brothers subsidiary over losses they incurred on complex investment products that crashed during the global financial crisis.
The decision is considered a test case as it follows the first full trial into the conduct of an investment bank in relation to the synthetic derivative investments known as collateralised debt obligations (CDOs).
The class action from 72 councils, charities and churches accused Lehman Brothers Australia, formerly Grange Securities, of alleged misleading conduct, breach of fiduciary duty and negligence in its marketing of CDOs.
In his decision, Supreme Court Justice Steven Rares said that these products were essentially a “sophisticated bet” and had high risks despite being portrayed as prudent and readily redeemable for cash.
He said while each of the three councils that led the case had different complaints, in relation to two councils “Grange was negligent in recommending to and advising” they made those investments.
Grange engaged in misleading and deceptive conduct when it promoted CDOs to the councils as suitable investments and also breached its fiduciary duties as a financial advisory to two councils.
“For these reasons, Grange is liable to compensate the councils for their losses incurred as a result of their investments,” he said.
Rares did not fix a figure on the compensation, saying the parties would need to calculate the amounts owing each council.
“Because Grange is in liquidation it cannot be ordered to make any payments at this time,” he said.
The three councils -- Wingecarribee, Parkes and Swan City -- had sought damages of up to A$200 million (US$209 million) under the Federal Court action aided by litigation funder IMF.
Most of the CDOs on which the councils lost money were bought from Grange Securities before it was acquired by Lehman Brothers Australia in 2007.


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Lehman Brothers

Three Australian councils win case against Lehman Bros unit

Women carrying boxes leave the Lehman Brothers headquarters in New York. The Australian arm of the 158-year-old investment bank bought Grange Securities in 2007.  