Oct. 4 (Bloomberg) -- Standard & Poor’s, under investigation by U.S. over the nation’s credit downgrade, gave its highest rating to notes whose value was dictated by “imagined events,” a lawyer appearing for a group of Australian investors told a court.
Two Australian towns and an insurer sued the U.K. arm of S&P’s owner McGraw-Hill Cos., along with financial services firms including the Royal Bank of Scotland’s Australian unit, which were involved in the sale of AAA-rated securities that plummeted in value during the global financial crisis in 2008.
“The note is really just a series of rules,” Noel Hutley, lawyer for the plaintiffs, told Federal Court Justice Jayne Jagot today in Sydney at the start of a scheduled 10-week trial. The rules were supposed to be affected by external events, yet were “akin to a game” with “imagined events” dictating the outcome, Hutley said.
Bathurst regional council and Corowa Shire Council seek to recoup the losses they incurred from the purchase of securities in 2006.
The Bathurst council paid A$1 million ($948,600) to acquire a Community Income Constant Proportion Debt Obligation Note, or a CPDO, on Dec. 20, 2006, and was advised less than two years later that the note was being unwound and the council would receive a repayment on the note of A$67,043, according to the statement of claim.
The start of Hutley’s opening statement was dominated with explanations and definitions of terms involved in the construction and sale of the CPDOs.
ABN Amro Bank NV, one of the lenders involved in the sale of the notes, objected to Hutley’s proposal to allow his opening statement to be made public.
The statement contains “sensationalist allegations” that aren’t based on the filings in court, Ian Jackman, the bank’s lawyer said.
The CPDO note was rated as AAA by S&P, and a financial market specialist at Local Government Financial Services Ltd. assured Bathurst’s accountants that the CPDO wasn’t like a CDO, in which the council had a specific policy not to invest, the Bathhurst council said in its filing.
“The Standard & Poor’s report was misleading and in material ways misdescribed the characteristics and operations of the CPDO note,” according to the filing.
Standard & Poor’s, based in New York, on Aug. 5 cut its rating on U.S. government debt to AA+ from AAA. The downgrade contributed to an equity rout that erased about $6.8 trillion from the value of global stocks from late July to mid August.
U.S. government officials have said the downgrade was based on a flawed analysis that overstated the nation’s debt by about $2 trillion. The Securities and Exchange Commission is scrutinizing the method S&P used to cut the rating and whether the firm properly protected confidential information, according to a person with direct knowledge of the probe, who declined to be identified because the inquiry isn’t public.
The case is: Bathurst Regional Council v. Local Government Financial Services Ltd. NSD936/2009. Federal Court of Australia (Sydney).
--Editors: Suresh Seshadri, Dave McCombs
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