72 to share in 200m compensation
THE Federal Court has paved the way for 72 councils, community organisations and churches to share in $200 million compensation from Lehman Brothers Australia.
Three councils - Wingecarribee and Parkes shire councils (NSW) and City of Swan (WA) - were the lead claimants in a class action against Lehman Brothers.
The councils, charities, not-for-profit and church groups - the full list of which has not been released for confidentiality reasons - collectively lost more than $200 million following investments in complex financial derivatives known as collateralised debt obligations, or CDOs, purchased from Lehman's Australian subsidiary prior to 2007.
These synthetic derivative investments plummeted in value during the global financial crisis of 2007 and 2008.
The councils and other claimants alleged misleading conduct, breach of contract, breach of fiduciary duty and negligence on the part of Lehman Australia in its marketing of the CDOs.
In his judgment, Justice Steven Rares found for the claimants and agreed that Lehman's had engaged in misleading conduct, had breached fiduciary duties, had breached their contract and were negligent.
The councils were represented by national law firm Piper Alderman and the action was funded by IMF Australia.
Piper Alderman partner Amanda Banton said the products sold to her clients were "simply not suitable".
"Our clients would not have purchased these investments had they been aware of the substantial risks of the products, including the exposure to a complete loss of capital. They were conservative investors," she said.
IMF (Australia) executive director John Walker, said the ruling would pave the way for significant recoveries from the estate of Lehman Australia, which is in liquidation.
"Our clients, a group of councils, charities and church groups, should never have been approached to buy these investments in the first place, as they were not in a position to understand the significant risks involved," Mr Walker said. "It is welcome news and a relief for the hundreds of thousands of Australians who rely on these community services."
The claims may now proceed by either settlement or a simple claims resolution process.
Prior to the GFC, about $5billion worth of CDOs were sold to Australian churches, councils, charities, colleges, and other not-for-profit public institutions ahead of expenditure on public works. Approximately $1 billion of these instruments came through Lehman Brothers Australia.
One Lehman Brothers victim represented in the claim was MontroseAccess, a registered charity in Queensland which provides support to hundreds of disabled children and young adults.
"This decision comes as a massive relief to the hundreds of disabled children and their families who rely on our services," MontroseAccess CEO Darrel Bourke said. "The losses from the Lehman investments in 2008 were significant. They affected our ability to employ support staff and extend core services to our clients and families. We can now plan ahead with more certainty."
The Court decision in favour of the claimants follows the High Court's rejection in 2010 of a controversial earlier arrangement obtained by liquidators for Lehman, PPB Advisory, on behalf of related Lehman Bros creditors.
This arrangement sought to limit the funds available to the claimants from the estate of Lehman Australia. As a result of this judgment those parties will be entitled to a fairer share of the estate.
Ms Banton said this judgment was likely to mean significantly higher returns to the councils, charities and church groups.