Bank 'duped' council
Tuesday, 8th March, 2011
A senior NSW council officer says Lehman Brothers Australia ignored his instructions, prior to the global financial crisis (GFC) in 2007, not to invest council funds in high risk products, a court has heard.
Lawyers for the collapsed investment bank yesterday argued that Wingecarribee Shire, in the NSW Southern Highlands, was aware of the risk involved in its investments with the bank, but went ahead due to the potential for high returns.
In a landmark $250 million Federal Court case stemming from the GFC, local councils last week argued they were duped by Lehman Brothers Australia, formerly Grange Securities, into thinking they were buying safe investments.
A total of 72 charities, churches, local councils and private investors are suing the now-defunct investment bank for losses incurred in the collapse of the sub-prime mortgage market.
Broken Hill City Council had 12 separate investments with Lehman Brothers, although only three are involved in the class action.
It has already written off $500,000 in one of the US sub-prime related securities it invested in seven years ago.
The liquidator for Lehman Brothers is trying to show that individual members of the class action were responsible for their own losses.
Wingecarribee Shire, about 140 kilometres southwest of Sydney, is suing to recover $21.4 million in losses.
The shire's financial services manager, Douglas Neville, the trial's first witness, yesterday told the Sydney court that Lehman Brothers ignored his instructions not to invest shire funds in high-risk collateralised debt obligations (CDOs), which were comprised partly of bonds backed by sub-prime mortgages.
He said he made it clear to Grange Securities advisers in a face-to-face meeting that the council only wanted to invest in "floating-rate notes with Australian banks, regulated by the Australian Prudential Regulation Authority".
But Barrister John Sheahan SC, acting for the liquidator of Lehman Brothers Australia, argued Mr Neville did not specifically exclude CDOs as an investment product in meetings with Grange.
Mr Sheahan put to Mr Neville that he was primarily concerned with increasing the shire's level of investment return, and that he must have understood that to gain a higher return would mean investing in higher risk products.
Mr Neville denied the suggestion, saying the council was told by Grange Securities that its money would only be invested in floating-rate notes (FRNs) - low-risk bonds that pay variable interest on a quarterly basis.
He said he believed it was possible, through "special deals" available to Grange as an investment adviser, to achieve a higher rate of return at no more risk.
Mr Neville said he first became suspicious that Grange had invested council funds in CDOs in February 2007, after the name was mentioned in a contract note.
But he did not become fully aware of the investments until July 2007.
"The first contract note on February 12 had CDOs in it, and that raised some suspicion," Mr Neville told the court.
The action is being defended by the liquidators of Lehman Brothers Australia, Steve Parbery and Neil Singleton of PPB.
Lehman Brothers Australia went into voluntary administration in September 2008 and was placed in liquidation in October 2009.
Mr Parbery gauged Lehman Australia's assets as between $171 million and $228 million last December.
If successful, applicants could receive a payout of 40 to 50 cents for each dollar lost.
The case is set down for four to five weeks. AAP/BDT