Lehman Failed to Advise of CDO Risks, Australian Towns Tell Sydney Court

Why in court case in HK concerning SFC107 the HK judge disregards these facts :

HKMA also cover up these facts in their investigation

Lehman Failed to Advise of CDO Risks, Australian Towns Tell Sydney Court
By Joe Schneider - Mar 2, 2011 1:57 PM GMT+0800

Lehman Brothers Holdings Inc.’s Australian unit failed to advise of the risks of collateralized debt obligations and ignored policies that required municipalities to invest conservatively, a lawyer for towns and councils seeking to recoup investment losses said.

The town officials “had little or no knowledge of the complex structured investments,” Tony Meagher, a lawyer representing the towns, told Federal Court Judge Steven Rares in Sydney today at the start of the trial.

Wingecarribee Shire Council, the City of Swan and Parkes Shire Council claim they were sold improper investments as Lehman pushed synthetic collateralized debt obligations, or SCDOs, to collect fees and commissions that were greater than it would have earned from selling term deposits. The towns, which represent Australian municipalities that bought SCDOs from Lehman from March 2003 to May 2008 and lost money, seek refunds for the cost of the investments.

By June 2005, 110 local governments in Australia, including 55 in New South Wales, with A$640 million ($646 million) in funds were being advised by Lehman, the towns said in court papers. Wingecarribee has A$21.4 million of losses on the books from the investments, some of which the town continues to hold, Meagher said. Swan and Parkes have losses of A$15.9 million on the books, he said.

‘Ignored Requests’
The synthetic collateralized debt obligations, which invest in credit default swaps or other non-cash assets to gain exposure to pools of debt comprising of mortgages, car loans or credit card debt, weren’t the sort of investments municipalities were allowed to make by law and Lehman ignored municipal officials’ requests to invest in floating rate notes where capital was guaranteed 100 percent, Meagher said.

In some of the CDOs, all the invested capital could be wiped out if one of the companies holding the debt defaulted, Meagher said.

“I can’t imagine local government officials having the capacity to assess the risk of default of companies around the world,” Rares said.

Lehman Brothers Holdings, the Australian unit’s parent, was the fourth-largest investment bank before filing for the biggest bankruptcy in U.S. history on Sept. 15, 2008. The Australian unit followed and appointed a voluntary administrator under the country’s bankruptcy laws, on Sept. 26, 2008.

Lehman’s Lawyer
John Sheahan, Lehman’s lawyer, declined to make an opening statement. He said the judge had “a good understanding” of the areas in dispute.

The Australian suit is the first time Lehman has been forced to defend itself in a trial over the sale of the SCDOs, John Walker, executive director of IMF (Australia), the country’s largest litigation funder, said in a telephone interview. IMF is paying the costs of the lawsuit.

“It’s the first one to go to trial internationally,” Walker said. Similar lawsuits have been filed in the U.S. and Europe, although none have reached the trial stage, he said.

Wingecarribee was repeatedly offered between November 2005 and January 2007 an individually managed portfolio program developed by Lehman for local governments, the town said. Wingecarribee signed the deal Jan. 15, 2007, and Lehman recommended the municipality invest A$3 million in a so-called Federation CDO. The town sold the CDO less than two years later for A$450,000, according to its financial statements.

Witness and expert testimony in the trial is scheduled to take four weeks, with an additional two weeks set aside for closing arguments, Meagher said outside court.

The case is Between Wingecarribee Shire Council and Lehman Brothers Australia Ltd. NSD 2492/2007. Federal Court of Australia (Sydney).

To contact the reporter on this story: Joe Schneider in Sydney at jschneider5@bloomberg.net

To contact the editor responsible for this story: Douglas Wong at dwong19@bloomberg.net
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