By Ross Kelly
SYDNEY--Standard & Poor's is being sued in a class action
initiated by 90 Australian townships, churches and charities that
allege it gave misleading ratings to complex investment instruments
that collapsed during the global financial crisis.
The suit filed in an Australian court Wednesday is part of an
attempt by the organizations to recover over 200 million Australian
dollars (US$207.4 million) that they invested in products sold by
Lehman Brothers Holding Inc.'s Australian unit that were highly
rated by S&P.
A statement of claim against S&P, a unit of McGraw-Hill Cos.
(MHP), was filed in the Federal Court of Australia, the court's
website confirmed Wednesday.
"The lawsuit is without merit and we will vigorously defend
ourselves against it. Our ratings were based on the good faith
judgment of our analysts and reflect what they knew at the time," a
Melbourne-based spokesman for S&P said in an e-mailed
statement.
Legal finance company IMF Australia Ltd. (IMF.AU), which is
bankrolling the action, said it relates to S&P's giving AAA and
AA ratings to eight collateralized debt obligations, or CDOs, that
rapidly lost their value in 2007 and 2008. Investors in the class
action are being represented by two townships--the City of Swan and
Moree Plains Shire Council, of Western Australia and New South
Wales states, respectively.
IMF is also funding the claims of about 70 of the 90 investors
in a separate suit against Lehman Bros. for selling the same
CDOs.
IMF said earlier this month the claim against Lehman Bros. may
be resolved following a creditor's vote on a settlement proposal
slated for next month. Creditors will be paid between 39.9
Australian cents and 49.2 Australian cents in the dollar under the
terms of the proposed settlement.
"The investors' claims against S&P in the action filed today
will be for the balance of their losses after receipt of any monies
from Lehman," IMF said in an e-mailed statement.
John Walker, IMF's Executive Director, said he expects investors
to recoup around A$70 million-A$80 million from Lehman Bros. and
will therefore be attempting to claim over A$120 million from
S&P through the action filed in the Federal Court.
In a separate case, Australia's Federal Court ruled in November
that S&P misled a dozen Australian townships by giving its
highest ratings to constant proportion debt obligations, or CPDOs,
created in 2006 by investment bank ABN Amro Bank NV.
The councils recovered about A$30 million in losses, according
the plaintiff's law firm Piper Alderman. It was the first such
judgment since the global financial crisis to find against a
ratings firm when rating a CDO or CPDO.
Leading up to the collapse of Lehman Bros., trillions of dollars
were invested in securitized products-including CDOs and CPDOs-that
frequently contained small portions of high-risk housing debt.
In the U.S., over a dozen lawsuits have been filed against
S&P by state attorneys general who claim the firm churned out
shoddy ratings before or after the financial crisis.
-Write to Ross Kelly at ross.kelly@wsj.com
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