Councils duped into buying CDOs, court told

March 2, 2011, 11:41 am

Local councils were duped by Lehman Brothers Australia into thinking they were buying safe investments, the Federal Court has heard at the start of a landmark $250 million lawsuit stemming from the global financial crisis.

In the case, 72 charities, churches, local councils and private investors are suing the now-defunct investment bank for losses incurred in the collapse of the subprime mortgage market.

Many of the councils had investment guidelines that prohibited buying collateralised debt obligations (CDOs) comprised partly of bonds backed by subprime mortgages, the Sydney court heard.

Barrister Tony Meagher, SC, acting for the 72 litigants, said one council investment manager told Lehman Australia, "No CDOs".

Instead, the council was told its money was being invested in floating-rate notes (FRNs) - low-risk bonds that pay variable interest on a quarterly basis.
"From the perspective of Swan (City of Swan), they were described as floating-rate notes," Mr Meagher told the court.
"They describe these, in fact, as floating-rate notes or in some cases as floating-rate notes CDOs."

Litigation funder IMF Australia is financially backing the 72 litigants. Its executive director, John Walker, said the outcome of the case could send shockwaves through the financial world.

"It's important in the sense that it's the first CDO case that is likely to come to judgment around the world," Mr Walker told reporters outside the court.
"This type of security is seen by many as the instruments that started the global financial crisis (in 2008)."

He said Lehman Australia had failed its clients.

"The churches, the councils and the charities relied upon Lehman Australia in regard to the purchase of these instruments and unfortunately to their detriment," Mr Walker said.

"We have the Crippled Children's Association (now Novita) that doesn't have the money to provide the calipers to the children that they service.

"We have councils that can't build the roads and the pools and the libraries."

Mr Walker estimated Australian clients invested $1.2 billion with Lehman Australia, with half that amount lost to the global financial crises.
Of the total, his 72 clients invested a total of $390 million and lost $250 million - the amount they are claiming from Lehman Australia.
Most of the clients are located in NSW, and the rest in WA.

He said Lehman had approximately $200 million in assets, and if successful, applicants could receive a payout of 40 cents to 50 cents for each dollar lost.

The case is set down for four to five weeks.

Councils duped into buying CDOs, court told - The West Australian