S&P loses landmark case over AAA ratings

The Federal Court of Australia has ordered Standard & Poor’s to pay damages to 13 municipalities, after they purchased securities given the highest credit rating prior to the 2008 financial downturn.

The court has ordered that S&P, ABN Amro Bank and Local Government Financial Services will pay a combined total of almost £10m to the municipalities, with interest and legal costs raising fees to as much as £20m.

LGFS was a distributor of the investments, called Rembrandt CPDO notes. The investments were arranged by ABN Amro and rated by S&P.

Justice Jayne Jagot said: “S&P’s rating of AAA of the Rembrandt 2006-2 and 2006-3 CPDO notes was misleading and deceptive and involved the publication of information or statements false in material particulars.”

According to The Telegraph, councils were assured the “Rembrandt” notes bought from Australian Local Government Financial Services in late 2006 had a less than 1pc chance of defaulting.

Jagot said: “ABN Amro was knowingly concerned in S&P’s contraventions of the various statutory provisions proscribing such a misleading and deceptive conduct.

“The very purpose of a rating is to provide investors with independent information by persons expert in assessing the creditworthiness of an investment so that, by a simple system of letters, an investor can know and compare the creditworthiness of investments.”

It is understood that S&P has as many as 20 cases of complaints regarding their credit ratings in the lead up to the financial crisis of 2008 outstanding. Moody’s and Fitch are also understood to be fighting similar legal cases.