Lehman Brothers, the investment bank that sparked the global financial crisis, has been ordered to pay hundreds of millions of dollars in compensation to Australian councils, charities and churches.
Transcript EMMA ALBERICI, PRESENTER: The Federal Court has ruled that the Australian arm of the infamous Wall Street institution Lehman Brothers misled Australian councils, charities and churches into making high risk investments which resulted in heavy losses during the global financial crisis. Lehman Brothers Australia, formerly known as Grange Securities, has been ordered to compensate 72 councils and charities led by the Wingecarribee and Parkes shires in New South Wales and city of Swan in Western Australia. The amount of compensation, expected to be in the hundreds of millions of dollars, will be finalised later this year. Today's ruling has implications for investors and regulatory authorities all around the world. Karl Hoerr reports. KARL HOERR, REPORTER: More than a year after the hearing, the wait for a decision was over. STEVEN RARES, JUSTICE, FEDERAL COURT: Grange was conscious that the trust its uninformed council clients placed in it was being used to Grange's advantage. For these reasons Grange is liable to compensate the councils for the losses incurred as a result of the investments. KARL HOERR: Two New South Wales councils and one in Western Australia took on Lehman Brothers in a class action involving dozens of other councils and non-profit organisations. They invested millions of dollars in complex financial products called "collateralised debt obligations". The money was intended for future use on facilities and services. But when the collapse of Lehman Brothers triggered the global financial crisis in 2008, the value of the investments plummeted. Those involved in the class action say they lost $250 million. Lehman Brothers Australia was accused of misleading conduct, breaching contracts and its duty to act in the interests of clients, as well as negligence. Justice Steven Rares agreed. STEVEN RARES: Grange engaged in misleading and deceptive conduct in breach of section 12DA of the ASIC Act when it promoted the SCDOs to the councils as suitable investments. AMANDA BANTON, LAWYER: Our clients were comprehensive in winning each of the claims and there was a finding that our clients were entailed to damages in respect of those claims, and that there would be no reduction in the amount of damages claimed for contributory negligence. KARL HOERR: The hearing was told the investments were much riskier than their AAA rating suggested, but those who bought in were kept in the dark. PANEL MEMBER: An investment bank that actually sought to target not-for-profit organisations and make profit from selling derivatives to them in circumstances where they certainly should not have sold those products to these targets. KARL HOERR: Wingecarribee's financial services manager Douglas Neville told the court he was shocked to learn the investments were linked to subprime and corporate debt. He said he told Lehman Brothers then-subsidiary Grange Securities the council was only interested in conservative products and definitely not CDOs. Mr Neville learned one of the investments wouldn't mature until 2047. The councils are now looking forward to getting some of their money back. COLIN CAMERON, CITY OF SWAN: The possible loss is around $8 million, so that's equivalent to some large playing fields and pavilions that are sorely needed in our growth areas, where ... one of our suburbs has probably got the most babies born in it in Australia KARL HOERR: The implications of the judgment will extend beyond Australia's shores because the products were sold globally. The case returns to court in November to sort through the details of the settlement.
