Standard & Poor’s and two other defendants were ordered to pay about A$20 million ($20 million) to Australian towns for losses on top-rated securities whose value plunged during the global financial crisis.
Australia Federal Court Justice Jayne Jagot, who in November found S&P, ABN Amro Bank NV and Local Government Financial Services Pty. liable for misleading the towns, today ordered them to pay the sum plus costs, according to a regulatory filing from IMF (Australia) Ltd., which funded the action. S&P said it would appeal.
Twelve Australian councils lost more than 90 percent of the A$16 million they invested in notes rated AAA by S&P. The ratings company unit of McGraw-Hill Cos. was accused by the U.S. last month in a separate lawsuit of inflating grades on mortgage-backed securities to win business, helping trigger the worst financial crisis since the Great Depression.
“The ruling is at odds with a number of well-established legal principles,” Richard Noonan, an S&P spokesman, said in an e-mailed statement on the Australian case. “These ratings were based on the good faith judgment of analysts.”
The U.S. is seeking as much as $5 billion in damages in its lawsuit filed Feb. 4 in Los Angeles. S&P rated more than $2.8 trillion of residential mortgage-backed securities and about $1.2 trillion of collateralized-debt obligations from September 2004 through October 2007, according to the U.S. complaint.
The “egregious” conduct of S&P and McGraw-Hill “goes to the very heart of the recent financial crisis,” U.S. Attorney General Eric Holder said in a news conference Feb. 5. More than a dozen U.S. states have followed with their own lawsuits, and Moody’s Investors Service downgraded McGraw-Hill’s ratings last month after taking into account the U.S. federal suit.
The company bent rating models to suit its business needs to the extent that one CDO analyst commented that loosening the measure of default risk for a certain security in 2006 “resulted in a loophole in S&P’s rating model big enough to drive a Mack truck through,” the U.S. said.
In Australia, the so-called Rembrandt notes were arranged by ABN Amro Bank NV, now part of Royal Bank of Scotland Group Plc, rated by S&P, and sold to the Australian councils by municipal adviser Local Government Financial Services.
Sebastian Venus, who had prepared an internal model for the notes at S&P, accused the analyst responsible for rating them of being a “wuss” who gave in to pressure from ABN Amro Bank NV in giving the highest grade.
“You rate something AAA, when it’s really A-?,” Venus said in an e-mail submitted during the trial.
The securities were unwound less than two years after the towns bought them because credit spreads kept increasing and their cash value was exhausted, according to a court filing.
Shares of IMF rose 3 percent to A$1.73 today.
The Australian case is: Bathurst Regional Council v. Local Government Financial Services Pty. NSD1268/2010. Federal Court of Australia (Sydney). The U.S. case is U.S. v. McGraw-Hill, 13-00779, U.S. District Court, Central District of California (Los Angeles).