Parties involved in a legal dispute over complex investments that lost over 90 per cent of their value during the financial crisis will return to court after mediation talks failed.
Local Government Financial Services (LGFS), McGraw-Hill International (UK), Royal Bank of Scotland (RBS), 12 New South Wales councils and Statecover were unable to reach a negotiated settlement during recent out-of-court talks, LGFS chief executive Peter Lambert said.
“However, LGFS remains open to further mediation talks in order to avoid dragging this matter through the courts,” he said.
A representative of the councils, Piper Alderman partner Amanda Banton, also confirmed mediation talks over Rembrandt losses had failed.
“We can confirm that the mediation was unsuccessful and the applicants will be prosecuting their claims against the respondents for the entirety of their losses plus costs and interest. The proceedings are listed for hearing in October 2011,” she said.
Both Lambert and Banton were unable to provide further details on why the mediation failed.
The dispute began in 2009, when the NSW councils, led by Corowa Shire Council and Parkes Shire Council, took LGFS to court over losses of more than 90 cents in the dollar on their total $16 million investment in Rembrandt constant proportion debt obligations 2006-3, also known as Community Income CPDO Notes.
Statecover subsequently took action in relation to a $10 million investment in an earlier series of the same note.
Rembrandt was a highly leveraged synthetic derivative product created by ABN Amro, which rebranded as RBS.
About $45 million of Rembrandt was placed with LGFS, which sold around $18.5 million to municipalities as Rembrandt 2006-3 Community Income CPDO Notes.
LGFS kept any unsold notes as an investment within its own balance sheet.
In March 2010, LGFS made a cross-claim against RBS and the credit ratings arm of McGraw-Hill International (UK), Standard & Poor’s, over the ratings and design of Rembrandt.
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 constant proportion debt obligations series.
“Firstly, against ABN Amro, we allege that there was a deficiency in the product’s design. Secondly, we allege that S&P was negligent in its assignment of a AAA rating on Rembrandt as it inadequately considered the product’s inherent risks,” Lambert said at the time.
LGFS also defended against councils’ claims that it engaged in misleading or deceptive conduct when it sold them Rembrandt.
An RBS spokesperson said: “We cannot comment on legal matters before the courts but what we can say is that RBS will vigorously defend current claims.”
