RBS Sued by WestLB Bad Bank Over CPDO Deal That Lost $42 Million

Royal Bank of Scotland Group Plc was sued by the successors of WestLB AG for allegedly misleading the failed German lender in a 2007 derivatives investment that lost more than 60 percent of its value.

WestLB lost 31.7 million euros ($42 million) on a 50 million-euro deal linked to constant proportion debt obligations created by RBS’s ABN Amro unit, Erste Abwicklungsanstalt and Portigon AG, the two entities that control the remnants of the bank, said in court documents filed Sept. 6 in London.

The triple A-rated instruments were “considerably riskier” than advertised, while ratings companies assessed them using faulty models provided by ABN, according to the claim. Portigon is helping EAA sell Dusseldorf, Germany-based WestLB’s holdings and wind up its operations.

CPDOs, leveraged vehicles that comprised default insurance linked to company indexes, lost almost all their value after the 2008 collapse of Lehman Brothers Holdings Inc. caused the price of underlying credit-default swaps to fall. Banks have been sued over a variety of products that faltered after the crisis, ranging from interest-rate swaps to mortgage-backed securities.

Twelve Australian towns lost more than 90 percent of what they invested in ABN Amro’s “Rembrandt” notes, and won A$20 million ($18.5 million) in damages after suing ABN and McGraw Hill Financial Inc.’s Standard & Poor’s for misleading them.

“The notes, and the rating assigned to them, were an ABN creation and ultimate liability for the wholesale failure of the notes rests with ABN and RBS,” Sean Upson, a lawyer for EAA and Portigon, said in an e-mailed statement.

Ceased Operations

WestLB’s push into international investment banking ended when the European Union ordered it to cease operations last year as a condition for 17 billion euros in aid.

EAA is a state-backed entity winding down and selling WestLB’s assets. Portigon is a service and portfolio management provider to EAA and other parties.

CPDOs valued at more than $4 billion were sold by banks from 2006 through 2007, according to data compiled by CreditSights Inc.

RBS bought Amsterdam-based ABN Amro Holding NV for 72 billion euros in 2007. Sarah Small, a spokeswoman for the bank, declined to comment on the suit.

The case is: Erste Abwicklungsanstalt (Anstalt des offentlichen Rechts) & Anr v. The Royal Bank of Scotland Plc & Ors, High Court of Justice, Chancery Division, HC13A01413.

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