In a case that should launch fresh legal action in Australia and could have global implications, a group of local charities, churches and councils has won a Federal Court victory against failed US investment bank Lehman Brothers.

Seventy-two entities banded together in a class action to sue Lehman Brothers for $248 million, claiming the bank breached contracts and fiduciary duties and engaged in misleading and negligent conduct in selling investments from Grange Securities, purchased by Lehman in Australia in 2007.

“Grange is liable to compensate the councils for their losses incurred as a result of their investments,” Justice Rares said in his findings delivered late on Friday.

The claimants all purchased subprime mortgage-related derivatives or collateralised-debt obligations (CDOs), which were sold in Australia as federation notes, rated AAA.

Around $1 billion of these federation notes were sold in Australia, but they were rendered worthless by the meltdown of the US housing sector in 2007. Another $4 billion in CDOs were sold to Australian local governments and the not-for-profit sector by other financial institutions.

 

Class, compensation and the court

Three lead claimants commenced the action that brought Friday’s judgement. Leading the action was southwest Sydney’s Wingecarribee Shire Council, which was seeking $21.4 million in damages, Parkes Shire Council in New South Wales and the city of Swan in Western Australia. More litigation from the remaining entities is now expected.

Although the class action was for $248 million in compensation, the amount awarded to the three lead claimants has yet to be finalised.

Amanda Banton, who represented the claimants for legal firm Piper Alderman, said the claims would not have purchased the products had they know of the risks and the exposure “to a complete loss of capital.”

“They were conservative investors and the products which were sold to them by Lehman were simply not suitable,” she said.

The Federal Court action went ahead after a High Court ruling in 2010 rejected an earlier arrangement obtained by Lehman liquidators on behalf of related Lehman creditors, which sought to limit funds available for legal claims.

That ruling should ensure that successful legal claimants are awarded a larger share of the Lehman estate.

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