Lehman Unit Followed Investment Agreement With Australia Town, Lawyer Says
Lehman Brothers Holdings Inc. (LEHMQ)’s Australian unit followed an investment agreement in buying collateralized debt obligations for a rural township, a lawyer for the unit Grange Securities Ltd. said today.
Grange “had very wide powers” under the agreement signed by Wingecarribee’s shire council, its lawyer John Sheahan said while questioning the town’s financial services manager Douglas Neville in a Sydney federal court trial.
Wingecarribee, about 140 kilometers (90 miles) southwest of Sydney, is suing to recover A$21.4 million ($21.7 million) in losses from the Lehman unit and says Grange ignored explicit instructions to avoid the CDOs, some of which were tied to sub- prime U.S. mortgages and collapsed in value. Two other towns, the West Australian city of Swan and Parkes Shire Council, northwest of Sydney, lost A$15.9 million and are also suing.
Neville had testified that he received assurances the council’s money would only be invested in floating rate notes and felt “betrayed,” when he found out in July 2007 much of it was put into CDOs.
“Why wouldn’t you take a pen and cross out everything except the floating rate notes?” in the investment agreement that also listed CDOs and mortgage-backed securities as approved investments, Sheahan asked Neville today.
The investment agreement was a “generic document” given to all councils and there was no need to alter it, Neville said.
“It would’ve made things perfectly clear,” Sheahan said.
“In hindsight,” Neville replied.
Lehman Brothers Holdings was the fourth-largest investment bank before filing for the biggest bankruptcy in U.S. history on Sept. 15, 2008. Grange Securities became Lehman Brothers Australia, which appointed a voluntary administrator under the country’s bankruptcy laws on Sept. 26, 2008.
IMF (Australia), the country’s largest litigation funder, is paying the costs of the lawsuit, the first such case to go to trial, according to John Walker, IMF’s executive director
The case is Between Wingecarribee Shire Council and Lehman Brothers Australia Ltd. NSD 2492/2007. Federal Court of Australia (Sydney).
To contact the reporter on this story: Joe Schneider in Sydney at jschneider5@bloomberg.net
To contact the editor responsible for this story: Douglas Wong at dwong19@bloomberg.net
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