Local Government Financial Services (LGFS) has hit back at councils' claims that it engaged in misleading or deceptive conduct when it sold complex financial instruments that lost more than 90 per cent of their value during the financial crisis.
The company argued the 12 New South Wales municipalities, led by Corowa Shire Council and Parkes Shire Council, failed to take reasonable care when they decided to invest $16 million in Rembrandt constant proportion debt obligations (CPDO) 2006-3, also known as Community Income CPDO notes.
The councils started their legal action against LGFS last year and are seeking full recovery of their investment.
LGFS said in documents filed to the Federal Court on 28 September that each council ignored or failed to consider the risks associated with an investment in the Rembrandt notes.
"Each applicant or group member ignored or failed to adequately consider [LGFS's] warnings as to the risk of loss from an investment in the Rembrandt notes and the other information about the Rembrandt notes which [LGFS] provided to that applicant or group member," the documents said.
"All or some of the applicants and group members ignored or failed to adequately consider their respective investment policies when investing in the Rembrandt notes.
"All or some of the applicants and group members failed to consider further information in relation to the Rembrandt notes available to each applicant and group member, including the information contained in an investment report prepared by Grove Research & Advisory."
LGFS pointed out that it obtained and provided each of the councils with information about the Rembrandt notes prepared by Standard & Poor's (S&P) and ABN Amro, including about the risks associated with Rembrandt.
The documents also said LGFS informed the municipalities that the Rembrandt notes involved a "degree of leverage risk", that the value of the investment may be "highly volatile" and that the risks included loss of all or a significant amount of the investment.
However, a representative of the councils, Piper Alderman partner Amanda Banton, claimed that at no time during the recommendation of the product did LGFS adequately inform the applicants or group members of the significant risks associated with an investment in the Rembrandt notes.
"Rather, the Rembrandt notes were promoted by LGFS as being a secure investment with a AAA-rated and robust structure."
Earlier in the year, LGFS commenced its own legal action against S&P's credit rating arm and ABN Amro over the ratings and design of the Rembrandt notes.
LGFS lodged a claim in the Federal Court seeking $15.5 million in compensation from S&P and ABN Amro on its investment in the Rembrandt CPDO series.
About $45 million of Rembrandt was placed with LGFS, which sold around $18.5 million to municipalities as Rembrandt 2006-2 and Community Income CPDO Notes.
LGFS chief executive Peter Lambert said Justice Jayne Jagot, the judge presiding over the case, would seek mediation for all parties in December.
"We believe that mediation is a sensible outcome," Lambert said.
Banton said that mediation would, in Piper Alderman's view, assist in resolving a number of factual issues in dispute and the firm hoped it would go some of the way to resolving the applicants' and group members' claims.
