Lehman Brothers sign being taken awaySummary – Federal Court rules Lehman Brothers Australia is financially liable for misleading clients including Church and Not-For-Profit Groups to purchase complex financial products.

In Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq) [2012] FCA 1028, the Federal Court of Australia has held that Lehman Bros Australia Ltd (In Liq), which was formerly called Grange Securities Ltd (Grange), is liable to compensate the 3 plaintiff Councils for losses incurred as a result of investing in highly complex investment products called collateralised debt obligations (products).

In this matter the 3 Councils led representative proceedings or a ‘class action’ on behalf of 72 other Councils, charities, Church and Not-For-Profit groups who collectively lost over $200million when the products purchased from Grange prior to 2008 either plummeted in value or were completely wiped out during the global financial crisis (GFC).  While only the claims of the 3 Councils were tested by the Court in these proceedings, as these are representative proceedings the Court can resolve issues of fact and law involving the representative applicants and the respondent that are common to claims that other group members have against the same respondent. 

In a detailed Judgment Judge Rares of the Federal Court held that:

  • Grange put itself forward to the Councils as a financial adviser that understood the investment requirements of local government;
  • Grange sold the products to the Councils as highly rated and suitable for a conservative investment strategy and one which would provide a greater financial return than traditional methods of investing ratepayer money such as in bank term deposits; 
  • None of the Councils had officers with any significant experience in investment or financial products outside limited classes of simpler investments;
  • Grange misled the Councils by promising the products had a high level of security for the invested capital, were easily tradable on a secondary market and could be readily liquidated for cash;
  • Grange was conflicted between its fiduciary duty to provide sound financial advice to the Councils and earning large profits on the sale of the products that it did not disclose to the Councils;
  • Grange was negligent in recommending to the Councils that they invest in the products; and
  • Grange engaged in misleading and deceptive conduct in breach of s.12D of the ASIC Act by promoting the products as suitable investments. 

The Judgment in favour of the 3 lead applicant Councils include findings of fact and law common to all 72 Councils, charities and Church groups and those parties may now proceed by either settlement or a simple claims resolution process.