(Adds possible SEC claim in fourth paragraph.)
Oct. 7 (Bloomberg) -- Standard & Poor’s, the ratings company accused of bowing to pressure from an Australian bank to issue its highest rating for notes that lost 94 percent of their value, thoroughly investigated the investment and didn’t just “rubber stamp” the bank’s opinion, a court was told.
S&P was sued along with ABN Amro Bank NV, the Australian affiliate of the Royal Bank of Scotland, by Australian towns over the sale of notes called Rembrandt that plummeted in value during the global financial crisis in 2008.
In the first lawsuit of its kind in the world, according to IMF (Australia) Ltd., which is funding the litigation, damages are being sought from S&P for misleading investors with its ratings. S&P, a unit of New York-based McGraw-Hill Cos., rated the Rembrandt notes AAA based on data supplied by ABN Amro Bank and under “significant pressure” from the bank, said Noel Hudley, a lawyer representing the towns.
S&P, blamed in an April Senate report for helping fuel the credit crisis, could face claims by the U.S. Securities and Exchange Commission related to a 2007 rating of mortgage-backed securities that was downgraded six months later, McGraw-Hill said last month. S&P said in August it will replace Deven Sharma as president at the end of this year with Douglas Peterson.
“You are the wuss for bending over in front of bankers and taking it,” Sebastian Venus, who had prepared an internal model for the notes at S&P, told Derek Ding, an analyst responsible for rating them, according to e-mail transcripts in a written version of the plaintiffs’ opening statement that was released by the court. “You rate something AAA, when it’s really A-?”
The plaintiffs cite “selectively” from the hundreds of documents that were submitted, S&P said in a written version of the opening statement its own lawyers plan to present in court today.
“Those e-mail exchanges also evidence the fact that S&P did not simply rubber stamp ABN’s opinion,” the company said in the filing. “Conflicting views are to be expected in the context of any serious process of analysis and consideration.”
A dozen Australian townships claim they lost A$15 million ($14.6 million) of A$16 million invested in the Community Income Constant Proportion Debt Obligation Notes. The notes were unwound less than two years after the towns bought them because credit spreads kept increasing and the notes’ cash value was exhausted, according to court documents.
The towns also sued Local Government Financial Services Ltd., a municipal financial adviser that bought the notes from ABN Amro Bank and resold them to the towns. LGFS also sued the bank, accusing it of breach of contract.
In his opening statement yesterday, ABN Amro Bank’s lawyer Ian Jackman said LGFS officials who purchased the notes were highly competent and should have known what they were buying.
“If you don’t understand a product, don’t go into it,” Jackman said. “Nowhere do we say we eliminate the risk. We can’t do that.”
The AAA rating gave the purchasers confidence that they were buying a product similar to a AAA-rated bond, Guy Parker, LGFS’s lawyer said yesterday.
S&P, which has been issuing credit ratings for almost 100 years, conducted extensive testing of the notes and analyzed the models before a committee at the firm was satisfied they deserved a AAA rating, the company said in its written submission.
“Rating is an art, not a science,” the company said. “There is no ‘correct’ procedure for ratings.”
Ratings firms have been faulted by lawmakers, regulators and investors for fueling the 2008 credit crisis by giving inflated grades on debt linked to risky loans. The Dodd-Frank Act, passed in response to the crisis, required the SEC to set up an office to oversee raters including S&P and its rivals Moody’s Corp. and Fitch Ratings Ltd.
The trial, which began Oct. 4, is scheduled for 10 weeks in Sydney.
The case is: Bathurst Regional Council v. Local Government Financial Services Ltd. NSD936/2009. Federal Court of Australia (Sydney).
--With assistance from Sarah McDonald in Sydney, and Beth Thomas in Tokyo. Editors: Douglas Wong, Christopher Scinta
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