The Australian Federal Court found credit rating agency Standard & Poor’s engaged in misleading and deceptive conduct when it gave a AAA rating to a highly-leveraged financial product marketed as Rembrandt notes.
The court found that Standard & Poor’s rated the financial product solely on information provided by the creators, ABN AMRO, and rejected the argument that the credit rating agency did not have a contractual relationship with the product provider (and thus a duty of care with the investors).
“This new and significant development follows a recent case where the court found rating agencies, investment managers and others can owe a duty of care to investors,” said Rommell Harding-Farrenberg, a Corrs Chambers Westgarth partner.
“If a financial product has been inappropriately rated or marketed, the rating agency, originator and investment manager could be held accountable. On one hand, this is a good result for investors. On the other, it should spark major changes in the due diligence and analysis process undertaken by rating agencies and other involved parties,” he added.
The case was brought by 13 councils in NSW that had collectively invested $16 million in the Rembrandt notes. When the investments collapsed, the councils lost more than 90 cents in the dollar.
Corrs Chambers Westgarth said the ruling could have implications beyond Australia.
“This decision could have major global implications in relation to litigation pending against rating agencies in the US and elsewhere,” Mr Harding-Farrenberg stated.
“The court will not impute responsibility simply because an investor has suffered losses. However, if there is evidence there was no reasonable basis for a rating, or where a rating analysis is not a result of an exercise of reasonable care, then rating agencies, developers and marketers of financial products may be vulnerable.”
