The Court’s finding in favour of the lead claimants, the three councils, will see damages awards of more than $200 million for 72 councils and community organisations in a class action brought against Lehman Brothers Australia.

The Federal Court action was taken by Wingecarribee and Parkes Shire Councils (NSW) and City of Swan (WA), representing 69 other councils, charities, not-for-profit and church groups.

The councils were represented by national law firm Piper Alderman and the action was funded by IMF.

The court heard that councils, charities, not-for profit and church groups collectively lost over $200 million following investments in collateralised debt obligations, purchased from Lehman’s Australian subsidiary prior to 2007.

The synthetic derivative investments plummeted in value during the global financial crisis of 2007 and 2008. The councils and other claimants alleged misleading conduct, breach of contract, breach of fiduciary duty and negligence on the part of Lehman Australia in its marketing of the CDOs.

Piper Alderman Partner Amanda Banton said: “Our clients would not have purchased these investments had they been aware of the substantial risks of the products, including the exposure to a complete loss of capital. They were conservative investors and the products which were sold to them by Lehman were simply not suitable.”

In his judgment, Justice Steven Rares found for the claimants and agreed that Lehman’s had engaged in misleading conduct, had breached fiduciary duties, had breached their contract and were negligent.

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IMF (Australia) executive director, John Walker, said the ruling will pave the way for significant recoveries from the estate of Lehman Australia. That recovery should deliver financial relief to scores of community-based organisations whose work had suffered because of losses incurred following the Lehman investments.

“Our clients, a group of councils, charities and church groups, should never have been approached to buy these investments in the first place, as they were not in a position to understand the significant risks involved,” Walker said.

The judgment in favour of the three lead applicants include findings of fact and law common to all 72 councils, charities and church groups whose claims may now proceed by either settlement or a simple claims resolution process.
 

Walker said the ruling is the first judgment following a trial examining the conduct of an investment bank concerning the manufacture and distribution of CDOs globally.
 

“The creation and sale of CDOs and similar synthetic derivatives around 2005-06, together with the securitisation of subprime mortgages in the US, was a material cause of the global financial crisis,” he said.
 

“Today’s ruling will be carefully examined by investors and regulatory authorities around the world.”
 

Prior to the GFC, about $5bn worth of CDOs were sold to Australian churches, councils, charities, colleges, and other not for profit public institutions ahead of expenditure on public works.  Approximately $1bn of these instruments came through Lehman Brothers Australia.