A court in Australia has ordered credit ratings agency Standard and Poor's to pay damages to 13 municipalities, after securities they bought with a top-notch S&P credit rating collapsed in the 2008 financial downturn.
Standard and Poor's Financial Services (S&P) said on Monday that it would appeal against a ruling that has deemed its ratings of certain derivates "misleading and deceptive."
The Federal Court of Australia ordered that S&P, ABN Amro Bank and Local Government Financial Services (LGFS) combine to pay 15 million Australian dollars ($15.3 million, almost 12 million euros) to 13 Australian municipalities, plus interest and legal costs. Total compensation could reach 30 million Australian dollars.
LGFS was a distributor of the investments in question, which were arranged by ABN Amro and rated by S&P - with a top-notch AAA rating assigned.
The derivatives, purchased in 2006, lost over 90% of their face value in the so-called financial crisis of 2008. Judge Jane Jagot said that the mining town councils were misled into thinking that the constant proportion debt obligations (CPDO's) they purchased were safe securities.
"The CPDO could achieve a rating of AAA only on the basis of an unreasonable combination of unreasonably optimistic inputs but not otherwise," Judge Jagot said in her verdict. "S&P did not assess the CPDO notes by reference to exceptional but plausible events in any way. To rate the CPDO notes AAA without having done so was to act without reasonable care as a ratings agency."
No credit ratings agency had previously faced trial over its ratings of synthetic derivatives, a financial instrument the judge described as "grotesquely complex," with the verdict a potential catalyst for further lawsuits.
The defendants had argued during the trial that caveat emptor - a Latin phrase meaning "buyer beware" - was present in all investment contracts, and S&P said afterwards that it was disappointed with the verdict.
"We reject any suggestion our opinions were inappropriate, and we will appeal the Australian ruling, which relates to a specific CPDO rating," an S&P spokesman said after the trial.
Sydney-based firm IMF Australia funded the class action lawsuit, and the group said it was considering similar cases in Europe, adding that it expected the decision to be upheld if appealed.
"They may appeal, but there's a 1,400-page judgment, the trial went for 12 weeks, it was hard-fought and it was a one-sided decision," IMF Australia's executive director, John Walker, said.
msh/mz (AFP, dpa)