A substantial settlement has been reached in an influential class action case in Australia, subject to court approval and other conditions, for the City of Swan (Western Australia), Moree Plains Shire Council (New South Wales), Baron-Hay Investments Pty Limited and 92 group members in the class action against McGraw-Hill Financial Inc and Standard & Poor’s International LLC. The settlement of this case is likely to have widespread international ramifications for similar actions against Standard & Poor’s (S&P) due to the number of products that were sold and rated throughout the world.
Squire Patton Boggs advised the applicants and group members. Group members included institutional investors, private high-net-worth individuals, local councils across Australia, significant charitable organisations and churches who bought synthetic collateralised debt obligations (SDCOs) issued by Lehman Brothers Australia Limited (LBA), which is in liquidation. These debt obligations were assigned credit ratings by S&P.
The class action in the Federal Court of Australia arose out of the purchase by the group members in 2005 to 2007 of eight LBA-issued SCDOs which were rated “AAA” or “AA” by S&P. The applicants alleged that S&P was negligent and engaged in misleading and deceptive conduct by assigning AA and AAA ratings to those products. S&P denied the allegations. When taken together with the expected dividend to be paid in the winding up of LBA, the result represents a success for the applicants and group members, exponentially better than the terms of the deed of company arrangement proposal put forward by LBA-related entities in 2009, which only offered group members a return of between AU$0.06 and AU$0.13 on the dollar.
Amanda Banton, partner at Squire Patton Boggs, said: “The outcome of this case has highlighted that organisations such as Standard & Poor’s require transparency and accountability in the formulation of the credit ratings that they assign to financial products such as SCDOs. Our clients based their conservative purchase decisions on the fact that the credit ratings assigned by the ratings agency were objective, independent and uninfluenced by any conflicts of interest that might compromise Standard & Poor's analytical judgment and reflected its true current opinion of the credit risks SCDOs posed to investors.”
John Poulsen, Squire Patton Boggs Australia Managing Partner, said: “We are thrilled with the outcome for our clients in this high-profile matter. We have proudly acted for the plaintiffs in this very complex high-value financial product litigation where regulators have not been able to achieve just outcomes.”