Standard & Poor's class action to test limit for claims

Australian Financial Review Mar 8 2018 11:00 PM

Jemima Whyte

A $250 million class action against Standard & Poor's ratings of risky financial products during the GFC is set to begin next Monday in the Federal Court of Australia and could pave the way for a wave of more claims.

This latest class action on behalf of local councils and other investors includes four claims and 13 separate products. It covers synthetic collaterised debt obligations (SCDO) products between 2006 and 2008 rated by S&P. It is unusual in that it is likely to be heard in court.

Last year, the Federal Court granted leave to investors in the class action to pursue a "tort of deceit claim" against S&P over the way it rated investments, arguing S&P intentionally tweaked its ratings methodology to rate products more highly. If successful, the tort of deceit claim means that class actions can be pursued until 2023.

"It's a significant case because it will determine what date noteholders could reasonably discover any deceit by Standard & Poor's in representing the rating of the product," said Squire Patton Boggs partner Amanda Banton, who is representing the investors.

"If the date [of the deceit being uncovered] is as late as last year, it potentially opens the way for more class actions in relation to the losses of the financial products of including corporate CDOS and RMBS CDOs."

Synthetic CDOs typically take exposure to the debt of about 100 companies – or residential mortgage backed securities (RMBs) – by purchasing insurance through the credit default swaps market. The premiums are then passed on to investors. But if a set number of companies default on their debt, the entire investment is declared worthless.

Duty of care

The global credit crisis and its aftermath led to many defaults of companies referenced by CDOs held by councils and other investors, with Australian councils and charity foundations losing hundreds of millions of dollars.

In addition to Standard & Poor's, ANZ is also being sued. The action cites ANZ's responsibilities as an AFSL licence holder, its duty of care and duties under the Code of Banking Practice.

Some of Squire Patton Boggs' previous actions were funded by IFM Bentham, but this one will be funded by Singaporean funder Litigation Capital Partners. Clifford Chance is representing S&P. Eight weeks has been set aside to hear the case.

In 2016, S&P settled a multimillion-dollar class action brought by around 90 councils, churches and charities who invested in the products; delivering litigation funder IMF Bentham an almost $50 million profit boost.

Class actions are increasing, though the vast majority settle out of court.

The Australian Law Reform Commission is conducting a federal inquiry into litigation funding, spurred by the increased incidence of class actions. A discussion paper is due by the end of May.