Standard & Poor’s and a unit of Royal Bank of Scotland Group Plc sought to overturn a 2012 Australian judgment that they misled investors by selling top-rated securities whose value plunged in the global financial crisis.
ABN Amro Bank NV, the RBS unit, argued at the start of a scheduled 10-day appeal hearing in Sydney today that it bore no responsibility for the rating on the notes and shouldn’t be held liable.
“ABN acted as the mere conduit on S&P’s triple A rating,” Ian Jackman, the bank’s lawyer, told the federal court appeal panel. “We’re not an expert rating agency.”
The repackaging of debt into securities with top rankings from S&P and other rating companies contributed to more than $2 trillion in losses and writedowns as Lehman Brothers Holdings Inc. collapsed in 2008 and the world fell into recession. S&P is also fighting U.S. claims for as much as $5 billion in civil penalties and is being sued in Amsterdam by 16 European institutional investors who claim its AAA ratings on derivatives were misleading.
The outcome of the Australian case will have implications globally, according to Harry Scheule, an associate professor of finance at the University of Technology in Sydney who serves on the editorial board of the Journal of Risk Model Validation. “It’s very closely watched around the world.”
S&P, ABN Amro Bank and Local Government Financial Services Pty, a municipal investment adviser, were ordered by an Australian judge last year to pay about A$20 million to 12 Australian towns for losses they incurred on the securities.
S&P, a unit of New York-based McGraw Hill Financial Inc., is to argue its appeal later this week.
“It is bad policy to enforce a legal duty against a party like S&P, who has no relationship with investors who use rating opinions, yet impose no responsibility on those investors to conduct their own due diligence,” the company said in an e-mailed response to questions last week. “It turns S&P’s predictions about the future into guarantees.”
ABN Amro Bank had arranged the creation of so-called Rembrandt notes, which were linked to credit-default swaps on investment grade companies. They were given the highest investment rating by S&P in 2006 and sold to Australian councils by LGFS.
The securities were unwound less than two years after the towns bought them because credit spreads kept increasing, exhausting their cash value, according to court filings. Twelve Australian councils lost more than 90 percent of the A$16 million they invested in the notes.
All three judges today challenged ABN Amro Bank’s assertion that it bore no responsibility for the ratings and lived up to its contract to structure the notes with particular characteristics, leaving it up to S&P to rate them.
“You gave the appearance of being a conduit, but you weren’t,” Justice John Gilmour said. “The opinion of S&P was not a truly independent opinion” because the bank was involved in its creation.
The case is Between ABN Amro Bank NV and Bathurst Regional Council. NSD501/2013. Federal Court of Australia (Full Court) Sydney.