Grange liquidators wear cost of mis-sold CDOs

The liquidators of Lehman Brothers Australia will have to compensate around 600 investors in toxic credit securities after the Federal Court ruled in favour of the plaintiffs in a class action on Friday.

The plaintiffs may receive only a third of the value of their claims (which total around A$250 million), however, given the aggregate claims on the Australian arm of the failed investment bank.

Justice Stephen Rares endorsed the thrust of the arguments advanced by the three councils chosen as representatives in the action: Wingecaribee Shire Council, City of Swan Council and Parkes Shire Council.

From 2003, each of the three councils shifted the investment of some of their surplus funds from bank securities (often floating-rate notes) to synthetic collateralised debt obligations. Grange Securities (as the Lehman subsidiary was then known) was the agent of this shift in investment choice.

The value of many of these CDOs collapsed as the 2007 credit shock progressed; sending Lehman Brothers worldwide broke at the height of the crisis in 2008.

Justice Rares wrote in his judgement that the councils "argued in submissions that Grange was a trusted financial adviser which had recommended these investments."

"In contrast, Grange contended that it was a mere seller of financial products and that [it] had offered the Councils no financial advice, but merely made an accurate sales pitch for those products.

"It is important to understand that each transaction for the sale or purchase of a CDO by a Council involved Grange as a principal which either bought or sold the CDO. The Councils were aware that Grange was acting for itself as a principal in these dealings, but not aware of any particular benefits it received from doing so.

"Grange, unlike the Councils, had the financial acumen, skill and capacity to analyse the risks associated with, and to make assessments of the value of, CDOs as financial investments."

The court ordered the parties to cooperate and draft final orders, including the preparation of an updated valuation of the CDOs.

The record of the most recent meeting of the committee of inspection of Lehman Brothers Australia, held in June, notes that the value of many of the CDOs has been "wiped out" and that others have a negligible value, though the value of some CDOs may have improved since then.