Bloomberg Anywhere Remote Login Bloomberg Terminal Demo Request


Connecting decision makers to a dynamic network of information, people and ideas, Bloomberg quickly and accurately delivers business and financial information, news and insight around the world.


Financial Products

Enterprise Products


Customer Support

  • Americas

    +1 212 318 2000

  • Europe, Middle East, & Africa

    +44 20 7330 7500

  • Asia Pacific

    +65 6212 1000


Industry Products

Media Services

Follow Us

S&P Says Investors Shouldn’t Rely Only on Rating Letters

Standard & Poor’s said 13 Australian townships that lost almost all of their A$17 million ($17.7 million) investment in derivative-linked notes shouldn’t have relied just on the AAA rating issued by the U.S. company.

That’s exactly what S&P said in an accompanying report, that you can’t rely on the rating as investment advice, Steven Finch, the company’s lawyer, said in closing submissions in Federal Court in Sydney today. “We don’t put the ratings out in three letters.”

The dispute over S&P’s letter ratings is part of the first suit accusing the company of misleading investors with its system for labeling a borrower’s creditworthiness, according to IMF (Australia) Ltd., which is funding the litigation. Twelve Australian townships, suing as a group, claim they lost A$15 million of A$16 million they invested in so-called Rembrandt notes rated AAA by S&P. A 13th township sued separately after losing more than 90 percent of its A$1 million investment.

Federal Court Justice Jayne Jagot, who will decide the case, questioned S&P’s argument that ratings alone can’t be relied on.

“So it’s meaningless,” Jagot said of the ratings.

“It’s not meaningless; it’s just attended by conditions which say ‘you can’t sue me if you rely on it,” Finch said.

The towns claimed in court documents that they relied on the AAA rating to make their investment decision. Town officials said during the trial they hadn’t read all of the accompanying documents.

The towns failed to make responsible efforts to understand the risks involved in investing in the notes, S&P said in written submissions to the judge.

‘You Can’t Sue’

“Seven of 13 councils didn’t read all of the report,” Finch said. “Ten of 13 said they didn’t understand it and 11 of 13 said if they did, they wouldn’t have bought it.”

Finch said when S&P makes clear investors shouldn’t rely on its advice, it has no duty of care to them.

“Once you’ve heard it, you can’t sue,” Finch said. “If the wall of protection could be penetrated, then it would be, we say, untenable to produce advice like that.”

Local Government Financial Services Ltd., the municipal adviser, also sued S&P, a New York-based unit of McGraw-Hill Cos., accusing the company of breach of duty and negligence in giving the notes the highest investment rating. LGFS filed the lawsuit after it was sued by the towns.

LGFS and the Australian townships also sued ABN Amro Bank NV, which became the Australian affiliate of the Royal Bank of Scotland Group Plc, and manufactured the investments. ABN Amro Bank said if it’s found liable, it will pursue a claim against S&P to recover its losses.

ABN Amro Bank

LGFS and the towns claimed ABN Amro Bank was negligent in passing on S&P’s AAA ratings to the municipal investment adviser who sold the notes to the towns.

ABN Amro Bank didn’t make any representations about the reliability of S&P’s AAA rating, the bank’s lawyer Ian Jackman, said in his closing statement.

LGFS had sought to find new investments to sell to municipal councils as it competed for business in 2006 with Grange Securities Ltd., which later became a unit of Lehman Brothers Holdings Inc.

LGFS purchased A$45 million of the Rembrandt notes from ABN Amro Bank, and resold A$18.5 million in 2006 and 2007, including A$17 million to the Australian towns that sued in a bid to recoup their losses, according to court documents.

As borrowing costs rose amid the most extreme financial conditions since the Great Depression, the notes’ cash value was exhausted and they were unwound in 2008, ABN Amro Bank said in its written submissions. About 6.7 percent of the investors’ principal was returned, the bank said.


U.S. lawmakers had accused ratings companies of mishandling their assessments of mortgage-backed securities, at the heart of the 2008 financial crisis, and Congress sought to reduce their influence as part of the Dodd-Frank Act of 2010.

S&P stripped the U.S. of its AAA credit rating on Aug. 5. Instead of eroding the value of U.S. government debt, the rating cut sparked financial market turmoil that made Treasuries and the world’s reserve currency favorites among investors, with 10-year note yields dropping to a record low of 1.6714 percent just seven weeks later.

The case is: Bathurst Regional Council v. Local Government Financial Services Ltd. NSD936/2009. Federal Court of Australia (Sydney).

Please upgrade your Browser

Your browser is out-of-date. Please download one of these excellent browsers:

Chrome, Firefox, Safari, Opera or Internet Explorer.