Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5)
[2012] FCA 1200
•5 November 2012
FEDERAL COURT OF AUSTRALIA
Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200
Citation: Bathurst Regional Council v Local Government Financial Services Pty Ltd (No 5) [2012] FCA 1200 Parties: BATHURST REGIONAL COUNCIL v LOCAL GOVERNMENT FINANCIAL SERVICES PTY LTD ACN 001 681 741, ABN AMRO BANK NV ARBN 079 478 612 and MCGRAW-HILL INTERNATIONAL (UK) LIMITED; AMERICAN HOME ASSURANCE COMPANY ABN 007 483 267
COOMA MONARO SHIRE COUNCIL ABN 19 204 741 100, COROWA SHIRE COUNCIL ABN 43 874 223 315, DENILIQUIN COUNCIL ABN 41 992 919 200, EUROBODALLA SHIRE COUNCIL ABN 47 504 455 945, MOREE PLAINS SHIRE COUNCIL ABN 46 566 790 582, MURRAY SHIRE COUNCIL ABN 77 334 235 304, NARRANDERA SHIRE COUNCIL ABN 96 547 765 569, NARROMINE SHIRE COUNCIL ABN 99 352 328 405, OBERON COUNCIL ABN 13 632 416 736, ORANGE CITY COUNCIL ABN 85 985 402 386, PARKES SHIRE COUNCIL ABN 96 299 629 630 and CITY OF RYDE ABN 81 627 292 610 v LOCAL GOVERNMENT FINANCIAL SERVICES PTY LTD ACN 001 681 741, ABN AMRO BANK NV ARBN 84 079 478 612 and MCGRAW-HILL INTERNATIONAL (UK) LIMITED; AMERICAN HOME ASSURANCE COMPANY ABN 007 483 267
STATECOVER MUTUAL LIMITED v LOCAL GOVERNMENT FINANCIAL SERVICES PTY LTD ACN 001 681 741, ABN AMRO BANK NV ARBN 84 079 478 612 and MCGRAW-HILL INTERNATIONAL (UK) LIMITED; AMERICAN HOME ASSURANCE COMPANY ABN 007 483 267753
File number(s): NSD 936 of 2009
NSD 1073 of 2009
NSD 1268 of 2010Judge: JAGOT J Date of judgment: 5 November 2012 Catchwords: CONTRACT – breach of contract – contract for provision of financial services – implied warranties in s 12ED Australian Securities and Investments Commission Act (2001) Cth – damages for breach of contract
CORPORATIONS – financial products – breach of Australian financial services licence under s 912A Corporations Act 2001 (Cth) – meaning of derivative in s 761D(1) of the Corporations Act 2001 (Cth) – meaning of debenture in s 9 of the Corporations Act 2001 (Cth)
CORPORATIONS – misleading and deceptive statements – whether statements based on reasonable grounds and result of exercise of reasonable care and skill – effect of disclaimers
CORPORATIONS – rescission – requirements of s 924A Corporations Act 2001 (Cth) – notice under s 925A – whether notice given within a “reasonable period”
DAMAGES – causation, remoteness, rule in Potts v Miller, contributory negligence, statutory damages
EQUITY – fiduciary obligations – formal advisory relationship arising out of contract – informal advisory relationship arising from conduct – whether breach of fiduciary duty – equitable compensation
INSURANCE – whether insured entity a party to contract of insurance – effect of s 48 Insurance Contracts Act 1984 (Cth) – duty of disclosure – construction of terms
NEGLIGENCE – whether duty of care owed – indeterminate liability – vulnerability – causation –unlawful conduct
RESTITUTION – availability of restitutionary remedies – defence of change of position – requirement of good faith
STATUTORY INTERPRETATION – whether investment permissible under s 625 Local Government Act 1993 (NSW) – whether product a security within the meaning of relevant Ministerial order – consequences if investment impermissible
TRADE PRACTICES – misleading and deceptive conduct – whether conduct engaged in “in this jurisdiction” – whether conduct in relation to financial product or financial services – “mere conduit” – accessorial liability – whether conduct should be excused under s 1317S Corporations Act 2001 (Cth)
Legislation: Australian Securities and Investments Commission Act 2001 (Cth)
Civil Liability Act 2002 (NSW)
Corporations Act 2001 (Cth)
Evidence Act 1995 (Cth)
Federal Court of Australia Act 1976 (Cth)
Insurance Contracts Act 1984 (Cth)
Interpretation Act 1987 (NSW)
Judiciary Act 1903 (Cth)
Law Reform (Miscellaneous Provisions) Act 1946 (NSW)
Law Reform (Miscellaneous Provisions) Act 1965 (NSW)
Local Government (Financial Regulation) Regulation 1999 (NSW)
Local Government (Powers of Investment) Amendment Act 1983 (NSW)
Local Government Act 1919 (NSW)
Local Government Act 1993 (NSW)
Trade Practices Act 1974 (Cth)
Trustee Act 1925 (NSW)
Uniform Civil Procedure Rules 2005 (NSW)Cases cited: Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3) (2006) 67 NSWLR 341; [2006] NSWCA 282
Academy of Health and Fitness Pty Ltd v Power [1973] VR 254
Adeels Palace Pty Ltd v Moubarak (2009) 239 CLR 420; [2009] HCA 48
Advance (NSW) Insurance Agencies Pty Ltd v Matthews (1989) 166 CLR 606
Aequitas v AEFC [2001] NSWSC 14
Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310
Allianz Australia Insurance Ltd v GSF Australia Pty Ltd (2005) 221 CLR 568; [2005] HCA 26
Alpha Wealth Financial Services Pty Ltd v Frankland River Olive Co Ltd (2008) 66 ACSR 594; [2008] WASCA 119
Argy v Blunts & Lane Cove Real Estate Pty Ltd (1990) 26 FCR 112
Astley v Austrust Ltd (1999) 197 CLR 1; [1999] HCA 6
Australian Competition and Consumer Commission v Dukemaster Pty Ltd [2009] FCA 682
Australian Securities and Investments Commission v Adler (2002) 41 ACSR 72; [2002] NSWSC 171
Australian Securities and Investments Commission v Camelot Derivatives Pty Ltd (in liq) (2012) 88 ACSR 206; [2012] FCA 414
Australian Securities and Investments Commission v Fortescue Metals Group Ltd (No 5) (2009) 264 ALR 201; [2009] FCA 1586
Australian Securities and Investments Commission v Healey (2011) 196 FCR 291; [2011] FCA 717
Australian Securities and Investments Commission v Healey (No 2) (2011) 196 FCR 430; [2011] FCA 1003
Australian Securities and Investments Commission v McLeod (2000) 22 WAR 255; [2000] WASCA 101
Australian Securities and Investments Commission v Oxford Investments (Tasmania) Pty Ltd (2008) 169 FCR 522; [2008] FCA 980
Australian Securities and Investments Commission v Sydney Investment House Equities Pty Ltd (2008) 69 ACSR 1; [2008] NSWSC 1224
Avoca Consultants Pty Ltd v Millennium3 Financial Services Pty Ltd (2009) 179 FCR 46; [2009] FCA 883
Bakewell v Deputy Commissioner of Taxation (SA) (1937) 58 CLR 743
Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1995] QB 375
Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191
Bateman v Slatyer (1987) 71 ALR 553
Birtchnell v Equity Trustees Executors & Agency Co Ltd (1929) 42 CLR 384
Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1; [2011] FCAFC 24
Boardman v Phipps [1967] 2 AC 46
Breen v Williams (1996) 186 CLR 71
Briginshaw v Briginshaw (1938) 60 CLR 336
British Fame (Owners) v Macgregor (Owners) [1943] AC 197
Broad v Commissioner of Stamp Duties (NSW) [1980] 2 NSWLR 40
Bryan v Maloney (1995) 182 CLR 609
Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592; [2004] HCA 60
C E Heath Casualty & General Insurance Ltd v Grey (1993) 32 NSWLR 25
Caltex Oil (Australia) Pty Ltd v The Dredge “Willemstad” (1976) 136 CLR 529
Caltex Refineries (Qld) Pty Ltd v Stavar (2009) 75 NSWLR 649; [2009] NSWCA 258
Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; [2009] HCA 25
Campomar Sociedad Limitada v Nike International Ltd (2000) 202 CLR 45; [2000] HCA 12
Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534
Chameleon Mining NL v Murchison Metals Limited [2010] FCA 1129
CIC Insurance Ltd v Bankstown Football Club Ltd (1997) 187 CLR 384
City of Botany Bay Council v Jazabas Pty Ltd [2002] ANZ ConvR 300; [2001] NSWCA 94
Clough v London & North Western Railway Co (1871-72) LR 7 Ex 26
Cole v South Tweed Heads Rugby League Football Club Ltd (2004) 217 CLR 469; [2004] HCA 29
Coleman v Myers [1977] 2 NZLR 225
Commercial Union Insurance Company of Australia Ltd v Ferrcom Pty Ltd (1991) 22 NSWLR 389
Commonwealth Bank of Australia v Finding [2001] 1 Qd R 168
Commonwealth Bank of Australia v Smith (1991) 42 FCR 390
Council of the City of Greater Taree v Wells (2010) 174 LGERA 208; [2010] NSWCA 147
Daly v Sydney Stock Exchange Limited (1986) 160 CLR 371
Darlington Futures Limited v Delco Australia Pty Ltd (1986) 161 CLR 500
David Securities Pty Ltd v Commonwealth Bank of Australia (1992) 175 CLR 353
Day v Perisher Blue Pty Ltd (2005) 62 NSWLR 731; [2005] NSWCA 110
Day & Dent Constructions Pty Ltd v North Australian Properties Pty Ltd (1982) 150 CLR 85
Digi-Tech (Australia) Pty Ltd v Brand (2004) 62 IPR 84; [2004] NSWCA 58
Dilosa v Latec Finance Pty Ltd (1966) 84 WN (Pt 1) (NSW) 557
Dovuro Pty Limited v Wilkins (2003) 215 CLR 317; [2003] HCA 51
Downey v Carlson Hotels Asia Pacific Pty Ltd [2005] QCA 199
Downs v Chappell [1997] 1 WLR 426
Elders Trustee & Executor Co Ltd v EG Reeves Pty Ltd (1987) 78 ALR 193
Elna Australia Pty Ltd v International Computers (Aust) Pty Ltd (No 2) (1987) 16 FCR 410
In re Enron Corporation Securities 511 F Supp 2d 742 (SD Tex 2005)
Entwells Pty Ltd v National & General Insurance Co Ltd (1991) 6 WAR 68
Environment Agency v Empress Car Co (Abertillery) Ltd [1999] 2 AC 22
Eric Preston Pty Ltd v Euroz Securities Limited (2011) 274 ALR 705; [2011] FCAFC 11
Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 188 CLR 241; [1997] HCA 8
Fitzgerald v Penn (1954) 91 CLR 268
Fletcher (as trustee of the Brian Fletcher Family Trust) v St George Bank Ltd (No 2) [2011] WASC 277
Friend v Brooker (2009) 239 CLR 129; [2009] HCA 21
Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1
GIO General Ltd v Wallace (2001) 11 ANZ Ins Cas 61-506; [2001] NSWCA 299
Gould v Vaggelas (1985) 157 CLR 215
Graham Barclay Oysters Pty Ltd v Ryan (2002) 211 CLR 540; [2002] HCA 54
Gray v Sirtex Medical Ltd (2011) 193 FCR 1; [2011] FCAFC 40
Haas Timber & Trading Co. Pty Ltd v Wade (1954) 94 CLR 593
Handevel Pty Ltd v Comptroller of Stamps (Vic) (1985) 157 CLR 177
Haviv Holdings Pty Limited v Howards Storage World Pty Ltd (2009) 254 ALR 273; [2009] FCA 242
Hawkins v Bank of China (1992) 26 NSWLR 562
Henville v Walker (2001) 206 CLR 459; [2001] HCA 52
HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601
HIH Claims Support Ltd v Insurance Australia Ltd (2011) 244 CLR 72; [2011] HCA 31
Hill v Rose [1990] VR 129
Hill v Van Erp (1997) 188 CLR 159
Hine v New South Wales Land and Housing Corporation [2009] FCA 1242
Hope v Bathurst City Council (1980) 144 CLR 1
Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; [2004] HCA 54
Ingot Capital Investments Pty Ltd v Macquarie Equity Capital Markets Ltd (2008) 73 NSWLR 653; [2008] NSWCA 206
James v Australia and New Zealand Banking Group Ltd (1986) 64 ALR 347
James Hardie Industries NV v Australian Securities and Investments Commission (2010) 274 ALR 85; [2010] NSWCA 332
Janssen-Cilag Pty Ltd v Pfizer Pty Ltd (1992) 37 FCR 526
Jones v Dunkel (1959) 101 CLR 298
Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413; [1999] HCA 25
Kizbeau Pty Ltd v W G & B Pty Ltd (1995) 184 CLR 281; [1995] HCA 4
Kuhl v Zurich Financial Services Australia Ltd (2011) 243 CLR 361; [2011] HCA 11
Learoyd v Whiteley [1887] 12 AC 727
Lemon v Austin Friars Investment Trust [1926] Ch 1
Lym International Pty Ltd v Marcolongo [2011] NSWCA 303
Maguire v Makaronis (1997) 188 CLR 449; [1997] HCA 23
Re Market Wizard Systems (UK) Ltd [1998] 2 BCLC 282
Marks v GIO Australia Holdings Limited (1988) 196 CLR 494; [1998] HCA 69
Mercedes-Benz (NSW) Pty Ltd v ANZ and National Mutual Royal Savings Bank (unreported, Sup Ct, NSW, Palmer J, 5 May 1992)
In re Merrill Lynch Auction Rate Securities Litigation (SDNY, No. 09 MD 2030(LAP), 9 February 2011)
MGICA (1992) Ltd (formerly MGICA Ltd) v Kenny & Good Pty Ltd (1996) 140 ALR 313
MGICA (1992) Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236
Miller v Miller (2011) 242 CLR 446; [2011] HCA
Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357; [2010] HCA 31
Mitchell Morgan Nominees Pty Ltd v Vella (2011) 16 BPR 30,189; [2011] NSWCA 390
Modbury Triangle Shopping Centre Pty Ltd v Anzil (2000) 205 CLR 254; [2000] HCA 61
Mutual Life & Citizens' Assurance Co Ltd v Evatt (1970) 122 CLR 628
National Exchange Pty Ltd v Australian Securities and Investments Commission (2004) 49 ACSR 369; [2004] FCAFC 90
Netaf Pty Ltd v Bikane Pty Ltd (1990) 26 FCR 305
New Zealand Netherlands Society “Oranje” Incorporated v Kuys (1973) 1 WLR 1126
NMFM Property Pty Ltd v Citibank Ltd (2000) 107 FCR 270; [2000] FCA 1558
North East Equity Pty Ltd v Proud Nominees Pty Ltd (2010) 269 ALR 262; [2010] FCAFC 60
North East Equity Pty Ltd v Proud Nominees Pty Ltd (2012) 285 ALR 217; [2012] FCAFC 1
Nuhan (in liq) v Jewel Superannuation Fund Pty Ltd [1980] 2 NSWLR 304
Nutectime International Pty Ltd v Timentel Pty Ltd (2011) 85 ACSR 570; [2011] NSWCA 257
Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd [No 2] [1997] 1 WLR 1627
Ohio Police & Fire Pension Fund v Standard & Poor’s Financial Services 813 F Supp 2d 871 (SD Ohio 2011)
Paige v FPI Limited (2001) Aust Torts Reports 81-625; [2001] NSWSC 627
Parker, In the matter of Purcom No 34 Pty Limited (In Liq) (No 2) [2010] FCA 624
Payne v Parker [1976] 1 NSWLR 191
Pereira v Director of Public Prosecutions (1988) 82 ALR 217
Permanent Trustee Australia Co Ltd v FAI General Insurance Co Ltd (2001) 50 NSWLR 679; [2001] NSWCA 20
Permanent Trustee Australia Ltd v FAI General Insurance Co Ltd (in liq) (2003) 214 CLR 514; [2003] HCA 25
Perre v Apand Pty Ltd (1999) 198 CLR 180; [1999] HCA 36
Pilmer v Duke Group Ltd (in liq) (2001) 207 CLR 165; [2001] HCA 31
Podrebersek v Australian Iron & Steel Pty Ltd (1985) 59 ALR 529
Potts v Miller (1940) 64 CLR 282
Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355; [1998] HCA 28
QBE Insurance Ltd v Shoobridge (2001) 33 MVR 28; [2000] TASSC 172
R v Scott (1990) 20 NSWLR 72
RAIA Insurance Brokers Ltd v FAI General Insurance Co Ltd (1993) 41 FCR 164
Rice v Schwab (CD Cal, No. SACV 10-00398-CJC (MLGx), 22 October 2010)
Rogers v Whitaker (1992) 175 CLR 479
SA Housing Trust v State Government Insurance Commission (1989) 51 SASR 1
Sargent v ASL Developments Ltd (1974) 131 CLR 634
Seddon v North Eastern Salt Co Ltd [1905] 1 Ch 326
Selected Seeds Pty Ltd v QBEMM Pty Ltd (2010) 242 CLR 336; [2010] HCA 37
Sharples v Minister for Local Government (2008) 166 LGERA 302; [2008] NSWLEC 328
Singer v Williams [1921] 1 AC 41
Smith New Court Securities Ltd v Citibank NA [1997] AC 254
St George Bank Ltd v Quinerts Pty Ltd (2009) 25 VR 666; [2009] VSCA 245
Street v Luna Park Sydney Pty Ltd (2009) 223 FLR 245; [2009] NSWSC 1
Sydney Water Corporation v Turano (2009) 239 CLR 51; [2009] HCA 42
Taco Co of Australia Inc v Taco Bell Pty Ltd (1982) 42 ALR 177
Tate v Williamson (1866) LR 2 Ch App 55
Tepko Pty Limited v Water Board (2001) 206 CLR 1; [2001] HCA 19
Tipperary Developments Pty Ltd v Western Australia (2009) 38 WAR 488; [2009] WASCA 126
Topham v Greenside Glazed Fire-Brick Co (1887) 37 Ch D 281
Travel Compensation Fund v Tambree (2005) 224 CLR 627; [2005] HCA 69
Ultramares Corporation v Touche 174 NE 441 (1931)
Unisys Australia Ltd v RACV Insurance Pty Ltd [2004] VSCA 81
Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; [1998] HCA 38
Vinidex Tubemakers Pty Ltd v Thiess Contractors Pty Ltd [2000] NSWCA 67
Voth v Manildra Flour Mills Pty Ltd (1990) 171 CLR 538
Ward Group Pty Ltd v Brodie & Stone Plc (2005) 64 IPR 1; [2005] FCA 471
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514
Watson v Foxman (1995) 49 NSWLR 315
Watts v Rake (1960) 108 CLR 158
Waverley Council v Ferreira (2005) Aust Torts Reports 81-818; [2005] NSWCA 418
Western Export Services Inc v Jireh International Pty Ltd [2010] NSWSC 622
Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17
Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) [2012] FCA 1028
Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515; [2004] HCA 16
Yorke v Lucas (1985) 158 CLR 661
Young Investments Group Pty Ltd v Stripe Capital Pty Ltd [2011] FCA 1147
Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484; [2003] HCA 15Balkin RP and Davis JLR, Law of Torts (4th ed, LexisNexis Butterworths, 2009)
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Meagher RP, Heydon JD and Leeming MJ, Meagher Gummow and Lehane’s Equitable Doctrines and Remedies (4th ed, LexisNexis Butterworths, 2008)
Seddon NC and Ellinghaus MP, Cheshire and Fifoot’s Law of Contract (9th ed, LexisNexis Butterworths, 2008)
JJ Spigelman QC, “Knowledge of a Corporate Insured” (1994) 6 ILJ 159Dates of hearing: 4-7, 10-14, 17-20, 24-28, 31 October 2011; 1-4, 7-11, 14-18, 21-25, 28-30 November 2011; 1, 7-9, 12, 14 December 2011; 22-23, 26-28 March 2012; 1 August 2012 Date of last submissions: 31 August 2012 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 3723 In NSD 936 of 2009: Counsel for the Applicant: Mr J E Thomson Solicitor for the Applicant: McIntosh McPhillamy & Co, Solicitors Counsel for the First Respondent: Mr G Parker SC with Mr J C Giles Solicitor for the First Respondent: Norton Rose Counsel for the Second Respondent: Mr I M Jackman SC with Mr M J Darke Solicitor for the Second Respondent: Allens Counsel for the Third Respondent: Mr S Finch SC with Ms E Collins SC, Ms K Barrett and Mr I Ahmed Solicitor for the Third Respondent: Clayton Utz Counsel for the Cross-Claimant on the Fifth Cross-Claim Mr S Couper QC with Mr J V Gooley and Mr G A F Connolly Solicitor for the Cross-Claimant on the Fifth Cross-Claim: Wotton and Kearney Lawyers In NSD 1073 of 2009: Counsel for the Applicants: Mr N Hutley SC with Mr A Coleman SC and Mr C H Withers Solicitor for the Applicants: Piper Alderman Counsel for the First Respondent: Mr G Parker SC with Mr J C Giles Solicitor for the First Respondent: Norton Rose Counsel for the Second Respondent: Mr I M Jackman SC with Mr M J Darke Solicitor for the Second Respondent: Allens Counsel for the Third Respondent: Mr S Finch SC with Ms E Collins SC, Ms K Barrett and Mr I Ahmed Solicitor for the Third Respondent: Clayton Utz Counsel for the Cross-Claimant on the Fifth Cross-Claim Mr S Couper QC with Mr J V Gooley and Mr G A F Connolly Solicitor for the Cross-Claimant on the Fifth Cross-Claim: Wotton and Kearney Lawyers In NSD 1268 of 2010: Counsel for the Applicant: The applicant did not appear Counsel for the First Respondent: Mr G Parker SC with Mr J C Giles Solicitor for the First Respondent: Norton Rose Counsel for the Second Respondent: Mr I M Jackman SC with Mr M J Darke Solicitor for the Second Respondent: Allens Counsel for the Third Respondent: Mr S Finch SC with Ms E Collins SC, Ms K Barrett and Mr I Ahmed Solicitor for the Third Respondent: Clayton Utz Counsel for the Cross-Claimant on the Fifth Cross-Claim Mr S Couper QC with Mr J V Gooley and Mr G A F Connolly Solicitor for the Cross-Claimant on the Fifth Cross-Claim: Wotton and Kearney Lawyers
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 936 of 2009
BETWEEN: BATHURST REGIONAL COUNCIL
ApplicantAND: LOCAL GOVERNMENT FINANCIAL SERVICES PTY LTD ACN 001 681 741
First RespondentABN AMRO BANK NV ARBN 079 478 612
Second RespondentMCGRAW-HILL INTERNATIONAL (UK) LIMITED
Third RespondentAMERICAN HOME ASSURANCE COMPANY
ABN 007 483 267
Cross-Claimant on the Fifth Cross-Claim
JUDGE:
JAGOT J
DATE OF ORDER:
5 NOVEMBER 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties are to confer and are to submit an agreed or competing timetable for the making of further submissions on the outstanding issues of interest and costs, as well as making of final orders, within 21 days of the date of this order.
2.The proceeding is to be listed for directions on a date to be determined in consultation with the parties within a further 14 days thereafter.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1073 of 2009
BETWEEN: COOMA MONARO SHIRE COUNCIL ABN 19 204 741 100
First ApplicantCOROWA SHIRE COUNCIL ABN 43 874 223 315
Second ApplicantDENILIQUIN COUNCIL ABN 41 992 919 200
Third ApplicantEUROBODALLA SHIRE COUNCIL ABN 47 504 455 945
Fourth ApplicantMOREE PLAINS SHIRE COUNCIL ABN 46 566 790 582
Fifth ApplicantMURRAY SHIRE COUNCIL ABN 77 334 235 304
Sixth ApplicantNARRANDERA SHIRE COUNCIL ABN 96 547 765 569
Seventh ApplicantNARROMINE SHIRE COUNCIL ABN 99 352 328 405
Eighth ApplicantOBERON COUNCIL ABN 13 632 416 736
Ninth ApplicantORANGE CITY COUNCIL ABN 85 985 402 386
Tenth ApplicantPARKES SHIRE COUNCIL ABN 96 299 629 630
Eleventh ApplicantCITY OF RYDE ABN 81 627 292 610
Twelfth ApplicantAND: LOCAL GOVERNMENT FINANCIAL SERVICES PTY LTD ACN 001 681 741
First RespondentABN AMRO BANK NV ARBN 079 478 612
Second RespondentMCGRAW-HILL INTERNATIONAL (UK) LIMITED
Third RespondentAMERICAN HOME ASSURANCE COMPANY
ABN 007 483 267
Cross-Claimant on the Fifth Cross-ClaimJUDGE:
JAGOT J
DATE OF ORDER:
5 NOVEMBER 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties are to confer and are to submit an agreed or competing timetable for the making of further submissions on the outstanding issues of interest and costs, as well as making of final orders, within 21 days of the date of this order.
2.The proceeding is to be listed for directions on a date to be determined in consultation with the parties within a further 14 days thereafter.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1268 of 2010
BETWEEN: STATECOVER MUTUAL LIMITED
ApplicantAND: LOCAL GOVERNMENT FINANCIAL SERVICES PTY LTD ACN 001 681 741
First RespondentABN AMRO BANK NV ARBN 079 478 612
Second RespondentMCGRAW-HILL INTERNATIONAL (UK) LIMITED
Third RespondentAMERICAN HOME ASSURANCE COMPANY
ABN 007 483 267
Cross-Claimant on the Fifth Cross-ClaimJUDGE:
JAGOT J
DATE OF ORDER:
5 NOVEMBER 2012
WHERE MADE:
SYDNEY
THE COURT ORDERS THAT:
1.The parties are to confer and are to submit an agreed or competing timetable for the making of further submissions on the outstanding issues of interest and costs, as well as making of final orders, within 21 days of the date of this order.
2.The proceeding is to be listed for directions on a date to be determined in consultation with the parties within a further 14 days thereafter.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 936 of 2009
BETWEEN: BATHURST REGIONAL COUNCIL
ApplicantAND: LOCAL GOVERNMENT FINANCIAL SERVICES PTY LTD ACN 001 681 741
First RespondentABN AMRO BANK NV ARBN 079 478 612
Second RespondentMCGRAW-HILL INTERNATIONAL (UK) LIMITED
Third RespondentAMERICAN HOME ASSURANCE COMPANY
ABN 007 483 267
Cross-Respondent
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1073 of 2009
BETWEEN: COOMA MONARO SHIRE COUNCIL ABN 19 204 741 100
First ApplicantCOROWA SHIRE COUNCIL ABN 43 874 223 315
Second ApplicantDENILIQUIN COUNCIL ABN 41 992 919 200
Third ApplicantEUROBODALLA SHIRE COUNCIL ABN 47 504 455 945
Fourth ApplicantMOREE PLAINS SHIRE COUNCIL ABN 46 566 790 582
Fifth ApplicantMURRAY SHIRE COUNCIL ABN 77 334 235 304
Sixth ApplicantNARRANDERA SHIRE COUNCIL ABN 96 547 765 569
Seventh ApplicantNARROMINE SHIRE COUNCIL ABN 99 352 328 405
Eighth ApplicantOBERON COUNCIL ABN 13 632 416 736
Ninth ApplicantORANGE CITY COUNCIL ABN 85 985 402 386
Tenth ApplicantPARKES SHIRE COUNCIL ABN 96 299 629 630
Eleventh ApplicantCITY OF RYDE ABN 81 627 292 610
Twelfth ApplicantAND: LOCAL GOVERNMENT FINANCIAL SERVICES PTY LTD ACN 001 681 741
First RespondentABN AMRO BANK NV ARBN 079 478 612
Second RespondentMCGRAW-HILL INTERNATIONAL (UK) LIMITED
Third RespondentAMERICAN HOME ASSURANCE COMPANY
ABN 007 483 267
Cross-Claimant on the Fifth Cross-Claim
IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
NSD 1268 of 2010
BETWEEN: STATECOVER MUTUAL LIMITED
ApplicantAND: LOCAL GOVERNMENT FINANCIAL SERVICES PTY LTD ACN 001 681 741
First RespondentABN AMRO BANK NV ARBN 079 478 612
Second RespondentMCGRAW-HILL INTERNATIONAL (UK) LIMITED
Third RespondentAMERICAN HOME ASSURANCE COMPANY
ABN 007 483 267
Cross-Claimant on the Fifth Cross-Claim
JUDGE:
JAGOT J
DATE:
5 NOVEMBER 2012
PLACE:
SYDNEY
TABLE OF CONTENTS
1........ . INTRODUCTORY OBSERVATIONS........ ........ ........ ........ ........ ........ ........ ........ ....
[1]
1.1...... The matter generally........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[1]
1.2...... The councils’ claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[9]
1.3...... LGFS’s claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[13]
1.4...... S&P’s claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[15]
1.5...... ABN Amro’s claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[16]
1.6...... The insurance case........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[17]
1.7...... These reasons........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[18]
2........ . DEFINITIONS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[21]
3........ . KEY DOCUMENTS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[24]
3.1...... Ministerial order........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[25]
3.2...... Investment guidelines........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[27]
3.3...... Local Government Best Practice Guide........ ........ ........ ........ ........ ........ ........
[32]
3.4...... S&P credit ratings definitions........ ........ ........ ........ ........ ........ ........ ........ .......
[34]
3.5...... The ABN Amro Surf presentation........ ........ ........ ........ ........ ........ ........ ........ .
[36]
3.6...... The ABN Amro term sheet........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[41]
3.7...... The S&P reports........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[43]
3.8...... The LGFS community income notes brochure........ ........ ........ ........ ........ .....
[48]
3.9...... The transfer and acceptance forms........ ........ ........ ........ ........ ........ ........ ........
[52]
3.10.... The Grove report........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[53]
4........ . DEVELOPMENT AND RATING OF THE CPDO – DOCUMENTARY RECORD........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[54]
4.1...... Credit default swaps........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[55]
4.2...... S&P’s ratings generally........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[62]
4.3...... S&P’s processes generally........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[68]
4.4...... The ABN Amro CPDO........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[71]
4.5...... People involved........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[72]
4.6...... Before the CPDO........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[76]
4.7...... The DPN and the anti-DPN........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[79]
4.8...... The anti-DPN turns into the CPDO........ ........ ........ ........ ........ ........ ........ .......
[90]
4.9...... The anti-DPN (or CPDO) is introduced to S&P........ ........ ........ ........ ........ ...
[95]
4.10.... The issue of spread volatility arises........ ........ ........ ........ ........ ........ ........ .......
[112]
4.11.... The CPDO goes to an S&P committee........ ........ ........ ........ ........ ........ ........ .
[157]
4.12.... The S&P committee requires more testing........ ........ ........ ........ ........ ........ ....
[159]
4.13.... ABN Amro provide S&P with more analyses........ ........ ........ ........ ........ .......
[172]
4.14.... S&P’s further analyses........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[178]
4.15.... The S&P committee reconsiders the CPDO........ ........ ........ ........ ........ ........ ..
[200]
4.16.... Launching the CPDO........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[202]
4.17.... Some issues arise within ABN Amro about roll costs........ ........ ........ ........ ..
[210]
4.18.... CPDOs in other currencies including AUD........ ........ ........ ........ ........ ........ ..
[227]
4.19.... Tightening spreads and the CPDO........ ........ ........ ........ ........ ........ ........ ........
[238]
4.20.... After S&P’s AAA rating of the Australian CPDO........ ........ ........ ........ ........
[324]
5........ . S&P WITNESSES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[377]
5.1...... Introduction........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[377]
5.2...... Cian Chandler........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[378]
5.2.1... Background........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[378]
5.2.2... Mr Chandler’s description of the CPDO........ ........ ........ ........ ........ ...
[389]
5.2.3... Mr Chandler’s role as the primary analyst of the CPDOs........ ........ .
[391]
5.2.4... Default risk........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[395]
5.2.5... Spread risk........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[402]
5.2.6... LTAS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[404]
5.2.7... Mean reversion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[405]
5.2.8... Secondary risks........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[406]
5.2.9... AAA rating for the CPDO – Mr Chandler’s affidavit evidence........
[408]
5.2.10. Australian CPDOs – Rembrandt........ ........ ........ ........ ........ ........ ........
[418]
5.3...... Mr Chandler – cross-examination........ ........ ........ ........ ........ ........ ........ ........ .
[427]
5.3.1... The CPDO........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[427]
5.3.2... Base case........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[428]
5.3.3... The relationship between modelling results and S&P’s ratings........
[429]
5.3.4... Spread volatility........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[433]
5.3.5... Migration risk........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[458]
5.3.6... The carry assumption........ ........ ........ ........ ........ ........ ........ ........ ........ .
[462]
5.3.7... Following the S&P committee of 31 May 2006........ ........ ........ ........
[464]
5.3.8... The S&P pre-sale report........ ........ ........ ........ ........ ........ ........ ........ ....
[473]
5.3.9... Initial spreads and Rembrandt CPDOs........ ........ ........ ........ ........ ......
[480]
5.3.10. Nature and identity of investors........ ........ ........ ........ ........ ........ ........ .
[495]
5.4...... Hui (Derek) Ding........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[496]
5.4.1... Background........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[496]
5.4.2... The ABN Amro CPDO........ ........ ........ ........ ........ ........ ........ ........ ......
[502]
5.4.3... Default risk........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[506]
5.4.4... Spread risk........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[509]
5.4.5... Long-term average spread........ ........ ........ ........ ........ ........ ........ ........ .
[511]
5.4.6... Mean reversion speed........ ........ ........ ........ ........ ........ ........ ........ ........
[512]
5.4.7... Spread volatility........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[513]
5.4.8... Modelling spread risk........ ........ ........ ........ ........ ........ ........ ........ ........
[517]
5.4.9... Bid/offer risk........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[518]
5.4.10. Interest rate risk........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[519]
5.4.11. Model tie-out........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[520]
5.4.12. Modelling the CPDO........ ........ ........ ........ ........ ........ ........ ........ ........ .
[521]
5.4.13. S&P committee meeting of 31 May 2006........ ........ ........ ........ ........ .
[523]
5.4.14. Rembrandt CPDOs........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[526]
5.4.15. Investors........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[529]
5.5...... Mr Ding – cross-examination........ ........ ........ ........ ........ ........ ........ ........ ........
[530]
5.5.1... The CPDO........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[530]
5.5.2... Mr Ding’s role........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[531]
5.5.3... Spread volatility........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[532]
5.5.4... Long-term average spread........ ........ ........ ........ ........ ........ ........ ........ .
[555]
5.5.5... Ratings migration........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[559]
5.5.6... S&P defaults........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[564]
5.5.7... Base case and sensitivity testing........ ........ ........ ........ ........ ........ ........
[566]
5.5.8... Initial spreads and Rembrandt CPDOs........ ........ ........ ........ ........ ......
[573]
6........ . ABN AMRO WITNESSES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[587]
6.1...... Introduction........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[587]
6.2...... Jamie Cole........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[588]
6.2.1... Background........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[588]
6.2.2... ABN Amro modelling........ ........ ........ ........ ........ ........ ........ ........ .......
[589]
6.2.3... The need for a rating........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[592]
6.2.4... S&P’s rating process........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[593]
6.2.5... Modelling assumptions........ ........ ........ ........ ........ ........ ........ ........ ......
[595]
6.2.6... Other ratings agencies........ ........ ........ ........ ........ ........ ........ ........ ........
[616]
6.3...... Mr Cole – cross-examination........ ........ ........ ........ ........ ........ ........ ........ ........
[620]
6.3.1... Mr Cole’s understanding of S&P’s rating process........ ........ ........ ....
[620]
6.3.2... ABN Amro’s acceptance of a rating........ ........ ........ ........ ........ ........ ..
[624]
6.3.3... ABN Amro’s objectives........ ........ ........ ........ ........ ........ ........ ........ ....
[626]
6.3.4... Spreads, volatility, mean reversion speed and defaults........ ........ .....
[628]
6.3.5... Roll costs........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[657]
6.3.6... Rating stability........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[660]
6.3.7... S&P pre-sale report........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[662]
6.3.8... Spread tightening........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[665]
6.4...... Brandon Lewis........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[668]
6.4.1... Background........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[668]
6.4.2... Rembrandt CPDOs........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[669]
6.5...... Mr Lewis – cross-examination........ ........ ........ ........ ........ ........ ........ ........ ......
[673]
6.6...... Elliott Levick........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[678]
6.6.1... Background........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[678]
6.6.2... Rembrandt CPDOs........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[679]
6.7...... Mr Levick – cross-examination........ ........ ........ ........ ........ ........ ........ ........ .....
[685]
7........ . EXPERT EVIDENCE........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[691]
7.1...... Introduction........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[691]
7.2...... Mr Wood........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[699]
7.2.1... Qualifications and experience........ ........ ........ ........ ........ ........ ........ ....
[699]
7.2.2... Credit default swaps........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[700]
7.2.3... The CDS referencing the indices........ ........ ........ ........ ........ ........ .......
[703]
7.2.4... The net asset value (NAV) of CPDOs........ ........ ........ ........ ........ .......
[704]
7.2.5... S&P’s modelling – general........ ........ ........ ........ ........ ........ ........ ........
[705]
7.2.6... S&P’s modelling – input assumptions........ ........ ........ ........ ........ .......
[710]
7.2.7... Model results........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[714]
7.2.8... Spread tightening........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[719]
7.2.9... Performance of the Rembrandt CPDOs........ ........ ........ ........ ........ .....
[721]
7.2.10. Mr Wood’s conclusions........ ........ ........ ........ ........ ........ ........ ........ .....
[722]
7.3...... Professor Schlögl........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[723]
7.3.1... Qualifications and experience........ ........ ........ ........ ........ ........ ........ ....
[723]
7.3.2... Professor Schlögl’s first report........ ........ ........ ........ ........ ........ ........ ..
[724]
7.3.3... Professor Schlögl’s second report........ ........ ........ ........ ........ ........ .....
[729]
7.4...... Dr Ellis........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[736]
7.4.1... Qualifications and experience........ ........ ........ ........ ........ ........ ........ ....
[736]
7.4.2... S&P’s modelling........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[737]
7.5...... Experts’ joint report........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[755]
7.5.1... Agreements........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[755]
7.5.2... Mr Wood........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[767]
7.5.3... Professor Schlögl........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[775]
7.5.4... Mr Stephenson........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[781]
7.5.5... Mr Reoch........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[785]
7.5.6... Dr Ellis........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[788]
7.6...... Experts’ concurrent evidence........ ........ ........ ........ ........ ........ ........ ........ ........
[796]
7.6.1... Introduction........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[796]
7.6.2... Modelling generally........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[797]
7.6.3... Monte Carlo modelling generally........ ........ ........ ........ ........ ........ ......
[803]
7.6.4... Monte Carlo modelling – some specifics........ ........ ........ ........ ........ ..
[809]
7.6.5... Inputs into the model – generally........ ........ ........ ........ ........ ........ ......
[820]
7.6.6... What is stress testing?........ ........ ........ ........ ........ ........ ........ ........ ........
[831]
7.6.7... The meaning of S&P’s default probability for AAA (the 0.728%) and of a AAA rating........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[837]
7.6.8... Assigning an AAA rating........ ........ ........ ........ ........ ........ ........ ........ ..
[852]
7.6.9... The market risk nature of the CPDO........ ........ ........ ........ ........ ........ .
[863]
7.6.10. The hedging question........ ........ ........ ........ ........ ........ ........ ........ ........ .
[874]
7.6.11. Bear markets and credit spreads........ ........ ........ ........ ........ ........ ........
[877]
7.6.12. S&P’s model and modelling of the CPDO........ ........ ........ ........ ........
[893]
7.6.13. The LTAS input........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[917]
7.6.14. The volatility input........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[940]
7.6.15. S&P’s model inputs overall........ ........ ........ ........ ........ ........ ........ .......
[952]
8........ . LGFS’S HISTORY AND MARKETING........ ........ ........ ........ ........ ........ ........ ........ .
[960]
8.1...... Background........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[960]
8.2...... LGFS Funds Management Service Brochure........ ........ ........ ........ ........ ........
[964]
8.3...... Letter – Ministerial order of 24 March 2000........ ........ ........ ........ ........ ........ .
[966]
8.4...... Letter - draft investment policies........ ........ ........ ........ ........ ........ ........ ........ ...
[968]
8.5...... 2001 LGFS Presentation: Delivering the Goods for Councils........ ........ ......
[970]
8.6...... 2003 LGFS Presentation: Delivering for You........ ........ ........ ........ ........ .......
[971]
8.7...... LGFS website........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[972]
8.8...... LGFS corporate profile........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[981]
8.9...... Right Balance brochure........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[982]
8.10.... Right Balance letter........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[985]
8.11.... Right Balance agreement........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[986]
9........ . LGFS’s PURCHASE OF CPDO – DOCUMENTARY RECORD........ ........ ........ ..
[990]
9.1...... Background........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[990]
9.2...... LGFS Business Plan 2005/06 and related documents........ ........ ........ ........ ...
[992]
9.3...... Right Balance service and related documents........ ........ ........ ........ ........ .......
[1002]
9.4...... LGFS explores product development........ ........ ........ ........ ........ ........ ........ ....
[1011]
9.5...... Purchase and sale of Rembrandt 2006-2 and 2006-3........ ........ ........ ........ ....
[1025]
9.6...... Cash-out of Rembrandt notes........ ........ ........ ........ ........ ........ ........ ........ ........
[1130]
10....... LGFS WITNESSES........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[1134]
10.1.... Introduction........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[1134]
10.2.... Warwick Hilder........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[1135]
10.3.... Mark Tischler........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[1138]
10.4.... Structure and business of LGFS........ ........ ........ ........ ........ ........ ........ ........ ....
[1139]
10.5.... LGFS’s relationship with councils........ ........ ........ ........ ........ ........ ........ ........
[1141]
10.6.... Knowledge of individual councils........ ........ ........ ........ ........ ........ ........ ........ .
[1149]
10.7.... Right Balance service........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[1153]
10.8.... Structured financial products........ ........ ........ ........ ........ ........ ........ ........ ........ .
[1154]
10.9.... Purchase of Rembrandt 2006-2........ ........ ........ ........ ........ ........ ........ ........ .....
[1164]
10.10.. Purchase of Rembrandt 2006-3........ ........ ........ ........ ........ ........ ........ ........ .....
[1178]
10.11.. The Grove report........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[1188]
10.12.. Marketing of Rembrandt 2006-3 to councils........ ........ ........ ........ ........ ........ .
[1198]
11....... DISCUSSION AND FINDINGS – LGFS, THE COUNCILS, AND THE CPDO...
[1244]
11.1.... General findings........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[1244]
11.2.... The affidavits of the council officers........ ........ ........ ........ ........ ........ ........ ....
[1245]
11.3.... Overall relationships between LGFS and the councils........ ........ ........ ........ .
[1259]
11.4.... Right Balance service........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[1287]
11.5.... LGFS’s entry into a structured product deal........ ........ ........ ........ ........ ........ .
[1290]
11.6.... LGFS and the AAA Rating........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[1293]
11.7.... LGFS’s due diligence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[1298]
11.8.... LGFS’s promotion and sale of the Rembrandt notes to the councils........ ....
[1306]
11.9.... LGFS conflict of interest?........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[1373]
11.10.. The councils’ decisions to invest........ ........ ........ ........ ........ ........ ........ ........ ...
[1375]
11.11.. Aspects of S&P’s submissions about the councils........ ........ ........ ........ ........
[1407]
11.12.. Otherwise........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[1475]
11.13.. Eurobodalla........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[1476]
11.14.. Parkes........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[1496]
11.15.. Corowa........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[1598]
11.16.. Orange........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[1628]
11.17.. Moree........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[1655]
11.18.. Oberon........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[1690]
11.19.. Deniliquin........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[1753]
11.20.. Bathurst........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[1779]
11.21.. Narrandera........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[1841]
11.22.. Murray........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[1918]
11.23.. Cooma........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[1982]
11.24.. Narromine........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[2037]
11.25.. Ryde........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[2070]
11.26.. Summary........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[2117]
11.27.. LGFS’s conduct – misleading and deceptive?........ ........ ........ ........ ........ ......
[2119]
11.27.1 Statutory provisions........ ........ ........ ........ ........ ........ ........ ........ ........ .
[2119]
11.27.2 The councils’ cases – overview........ ........ ........ ........ ........ ........ .......
[2133]
11.27.3 Discussion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[2144]
11.27.3.1... General........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[2144]
11.27.3.2... The suitability representation........ ........ ........ ........ ........ ..
[2157]
11.27.3.3... Other misleading and deceptive conduct........ ........ ........
[2170]
11.27.3.4... Conclusions........ ........ ........ ........ ........ ........ ........ ........ .....
[2232]
11.28.. LGFS’S conduct – negligent?........ ........ ........ ........ ........ ........ ........ ........ .......
[2240]
11.28.1. Statutory provisions........ ........ ........ ........ ........ ........ ........ ........ ........ .
[2240]
11.28.2. The councils’ case........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[2250]
11.28.3. LGFS’s response........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[2259]
11.28.4. Discussion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[2261]
11.28.4.1... General........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[2261]
11.28.4.2... Duty of care........ ........ ........ ........ ........ ........ ........ ........ .....
[2263]
11.28.4.3... Breach of duty........ ........ ........ ........ ........ ........ ........ ........ .
[2266]
11.28.4.4... Causation........ ........ ........ ........ ........ ........ ........ ........ ........ .
[2275]
11.28.4.5... Damage and remoteness........ ........ ........ ........ ........ ........ .
[2276]
11.28.4.6... Conclusions........ ........ ........ ........ ........ ........ ........ ........ .....
[2277]
11.29.. LGFS – fiduciary duty?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[2278]
11.29.1. The councils’ case........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[2278]
11.29.2. LGFS’s response........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[2289]
11.29.3. Discussion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[2300]
11.30.. LGFS – breach of AFSL?........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[2325]
11.30.1. The case against LGFS........ ........ ........ ........ ........ ........ ........ ........ ....
[2325]
11.30.2. LGFS’s response........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[2338]
11.30.3. Relevant provisions........ ........ ........ ........ ........ ........ ........ ........ ........ .
[2343]
11.30.4. Discussion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[2367]
11.31.. LGFS – breach of contract?........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[2385]
11.31.1. The councils’ claims........ ........ ........ ........ ........ ........ ........ ........ ........
[2385]
11.31.2. Discussion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[2389]
11.32.. Interim conclusions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[2397]
12....... DISCUSSION AND FINDINGS – S&P AND THE CPDO........ ........ ........ ........ .....
[2398]
12.1.... Claims against S&P........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[2398]
12.2.... LGFS’s case against S&P – an overview........ ........ ........ ........ ........ ........ ......
[2399]
12.2.1. General........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[2399]
12.2.2. Rating as an opinion........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[2402]
12.2.3. Meaning of AAA rating........ ........ ........ ........ ........ ........ ........ ........ .....
[2403]
12.2.4. Understanding of the rating........ ........ ........ ........ ........ ........ ........ .......
[2410]
12.2.5. Identity of the person speaking........ ........ ........ ........ ........ ........ ........ ..
[2411]
12.2.6. Asserted indeterminate liability........ ........ ........ ........ ........ ........ ........ .
[2412]
12.2.7. Statutory causes of action........ ........ ........ ........ ........ ........ ........ ........ ..
[2414]
12.2.8. Opinions and misleading and deceptive conduct........ ........ ........ .......
[2416]
12.2.9. No reasonable basis for S&P’s opinion........ ........ ........ ........ ........ .....
[2423]
12.2.10. Causation........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[2425]
12.2.11. Damages, indemnity and contribution........ ........ ........ ........ ........ .....
[2428]
12.3.... The councils’ case against S&P – an overview........ ........ ........ ........ ........ .....
12.3.1. General........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[2434]
12.3.2. Basis for opinion........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[2436]
12.3.3. Lack of genuine and reasonable basis for the rating........ ........ ........ ..
[2438]
12.3.4. S&P’s representations about spread widening........ ........ ........ ........ ..
[2454]
12.3.5. Negligence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[2455]
12.3.6. Misleading and deceptive conduct and false representations........ ....
[2460]
12.3.7. Additional claims by Bathurst........ ........ ........ ........ ........ ........ ........ ...
[2461]
12.4.... General findings........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[2463]
12.4.1. Proof........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[2464]
12.4.2. S&P’s basic propositions........ ........ ........ ........ ........ ........ ........ ........ ...
[2467]
12.4.3. S&P’s case on the meaning of an S&P credit rating........ ........ ........ .
[2503]
12.4.4. The Ornstein-Uhlenbeck model........ ........ ........ ........ ........ ........ ........ .
[2544]
12.4.5. Modelling of defaults........ ........ ........ ........ ........ ........ ........ ........ ........ .
[2555]
12.4.6. S&P’s base case........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[2581]
12.4.7. The LTAS input........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[2590]
12.4.8. The volatility input........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[2611]
12.4.9. The mean reversion speed input........ ........ ........ ........ ........ ........ ........
[2670]
12.4.10. Interest rate risk........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[2675]
12.4.11. Bid/offer risk........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[2676]
12.4.12. Stress testing........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[2678]
12.4.13. Starting spread level........ ........ ........ ........ ........ ........ ........ ........ ........
[2692]
12.4.14. Back-testing........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[2711]
12.4.15. The modelling results........ ........ ........ ........ ........ ........ ........ ........ ......
[2713]
12.4.16. The committee process........ ........ ........ ........ ........ ........ ........ ........ ....
[2731]
12.4.17. Cash-out of Rembrandt........ ........ ........ ........ ........ ........ ........ ........ ....
[2737]
12.5.... Negligence claims – the councils........ ........ ........ ........ ........ ........ ........ ........ ..
[2741]
12.5.1. Duty of care........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[2742]
12.5.1.1..... General........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[2742]
12.5.1.2..... Indeterminate liability........ ........ ........ ........ ........ ........ .....
[2745]
12.5.1.3..... Vulnerability........ ........ ........ ........ ........ ........ ........ ........ ...
[2767]
12.5.1.4..... Indirect relationship between S&P and the councils......
[2779]
12.5.1.5..... Contractual relationship between S&P and ABN Amro.
[2788]
12.5.1.6..... Non-interference in ordinary commercial behaviour......
[2795]
12.5.1.7..... Negligent misstatement requirements........ ........ ........ .....
[2804]
12.5.1.8..... Unlawful conduct of the councils........ ........ ........ ........ ...
[2810]
12.5.1.9..... Imposing a duty of care?........ ........ ........ ........ ........ ........ .
[2814]
12.5.2. Breach of the duty of care........ ........ ........ ........ ........ ........ ........ ........ ..
[2820]
12.5.2.1..... Civil Liability Act........ ........ ........ ........ ........ ........ ........ ...
[2820]
12.5.2.2..... Breach otherwise........ ........ ........ ........ ........ ........ ........ .....
[2826]
12.5.3. Causation........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[2837]
12.5.3.1..... General........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[2837]
12.5.3.2..... Factual causation........ ........ ........ ........ ........ ........ ........ .....
[2841]
12.5.3.3..... Disclaimers........ ........ ........ ........ ........ ........ ........ ........ .....
[2863]
12.5.3.4..... Extent of loss........ ........ ........ ........ ........ ........ ........ ........ ...
[2864]
12.5.3.5..... Impact of “CreditWatch Negative” placement........ .......
[2865]
12.5.3.6..... Impact of the downgrade of the Rembrandt notes........ ..
[2873]
12.5.3.7..... Impact of the global financial crisis........ ........ ........ ........
[2876]
12.5.3.8..... Indirect causation........ ........ ........ ........ ........ ........ ........ ....
[2877]
12.5.4. Remoteness of damage........ ........ ........ ........ ........ ........ ........ ........ ......
[2882]
12.5.5. Damage........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[2883]
12.6.... Statutory claims – the councils........ ........ ........ ........ ........ ........ ........ ........ ......
[2884]
12.6.1. General........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[2884]
12.6.2. Conduct “in this jurisdiction”........ ........ ........ ........ ........ ........ ........ ....
[2891]
12.6.3. Financial product or financial service........ ........ ........ ........ ........ .......
[2902]
12.6.4. Statement or information false or misleading........ ........ ........ ........ ....
[2905]
12.6.5. Misleading or deceptive........ ........ ........ ........ ........ ........ ........ ........ .....
[2911]
12.6.6. Causal connection between breach and damage........ ........ ........ ........
[2920]
12.6.7. Bathurst’s claims........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[2923]
12.7.... Negligence claims – LGFS........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[2925]
12.7.1. General........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[2925]
12.7.2. Duty of care........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[2926]
12.7.3. Breach of duty of care........ ........ ........ ........ ........ ........ ........ ........ ........
[2957]
12.7.4. S&P’s opinions reasonably held........ ........ ........ ........ ........ ........ ........
[2958]
12.7.5. Causation........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[2959]
12.7.6. Damage........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[2976]
12.8.... Statutory claims – LGFS........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[2977]
12.9.... LGFS’s claims relating to StateCover proceedings........ ........ ........ ........ ......
[2980]
12.9.1. Factual context........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[2980]
12.9.2. Statutory claims arising from StateCover settlement........ ........ ........
[2984]
12.9.3. Equitable contribution claims arising from StateCover settlement...
[2991]
12.9.4. Negligence claims arising from StateCover settlement........ ........ .....
[2993]
12.10.. Conclusions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[2994]
13....... DISCUSSION AND FINDINGS – ABN AMRO AND THE CPDO........ ........ .......
[2995]
13.1.... Claims against ABN Amro........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[2995]
13.2.... LGFS’s claims against ABN Amro – an overview........ ........ ........ ........ .......
[2996]
13.2.1. General........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[2996]
13.2.2. Additional facts........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[2997]
13.2.3. Representations case........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[3006]
13.2.4. The second negligence case........ ........ ........ ........ ........ ........ ........ .......
[3013]
13.2.5. The contract case........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[3014]
13.3.... The councils’ claims against ABN Amro – an overview........ ........ ........ ......
[3046]
13.3.1. General........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[3046]
13.3.2. Facts........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[3051]
13.3.3. Negligence........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[3074]
13.3.4. Corporations Act claims........ ........ ........ ........ ........ ........ ........ ........ ....
[3080]
13.3.5. ABN Amro’s submissions........ ........ ........ ........ ........ ........ ........ ........ .
[3085]
13.4.... LGFS’s misleading conduct claims........ ........ ........ ........ ........ ........ ........ .......
[3086]
13.4.1. ABN Amro’s representations........ ........ ........ ........ ........ ........ ........ ....
[3086]
13.4.2. ABN Amro representations misleading?........ ........ ........ ........ ........ ...
[3105]
13.4.3. Causation and loss........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[3167]
13.5.... LGFS’s negligence claims........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[3179]
13.5.1. Duties of care........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[3179]
13.5.2. Breach of the duties of care........ ........ ........ ........ ........ ........ ........ .......
[3201]
13.5.3. Causation........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[3215]
13.5.4. Other matters........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[3219]
13.6.... LGFS’s contract claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[3220]
13.6.1. The claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[3220]
13.6.2. Implied terms........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[3222]
13.6.3. Breach........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[3228]
13.6.4. Loss........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[3230]
13.7.... The councils’ claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[3237]
13.7.1. General........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[3237]
13.8.... The councils’ misleading conduct claims........ ........ ........ ........ ........ ........ .....
[3238]
13.8.1. Causation........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[3250]
13.8.2. Other matters........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[3252]
13.9.... The councils’ accessorial liability claims........ ........ ........ ........ ........ ........ ......
[3254]
13.10.. The councils’ negligence claims........ ........ ........ ........ ........ ........ ........ ........ ...
[3267]
13.10.1. The claims in general........ ........ ........ ........ ........ ........ ........ ........ .......
[3267]
13.10.2. Duty of care........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[3270]
13.10.3. Breach of duty........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[3280]
13.10.4. Causation........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[3281]
13.10.5. Loss and damage and other matters........ ........ ........ ........ ........ ........ .
[3285]
13.11.. Bathurst’s claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[3286]
14....... RESCISSION, RESTITUTION, CONTRIBUTORY NEGLIGENCE, LOSS, APPORTIONMENT........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[3288]
14.1.... Claims for rescission – Corporations Act........ ........ ........ ........ ........ ........ ......
[3288]
14.1.1. The councils’ case........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[3288]
14.1.2. LGFS’s response........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[3297]
14.1.3. Discussion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[3299]
14.2.... Restitution claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[3308]
14.2.1. Corporations Act........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[3308]
14.2.2. Local Government Act........ ........ ........ ........ ........ ........ ........ ........ ......
[3309]
14.3.... Misrepresentation........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[3314]
14.4.... Fiduciary claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[3319]
14.4.1. The councils’ case........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[3319]
14.4.2. Discussion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[3321]
14.4.2.1..... Rescission and restitution........ ........ ........ ........ ........ .......
[3321]
14.4.2.2..... Equitable compensation........ ........ ........ ........ ........ ........ ..
[3328]
14.5.... Cooma and Corowa – the contract claims against LGFS........ ........ ........ ......
[3335]
14.6.... The councils’ claims for damages against LGFS, S&P and ABN Amro......
[3339]
14.7.... The councils’ failure to take reasonable care/contributory negligence........ .
[3344]
14.8.... LGFS’s claims for damages against S&P and ABN Amro........ ........ ........ ...
[3351]
14.9.... LGFS’s failure to take reasonable care/contributory negligence........ ........ ..
[3354]
14.10.. The councils’ claims for damages........ ........ ........ ........ ........ ........ ........ ........ .
[3361]
14.11.. LGFS’s claims for damages........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[3364]
14.12.. Issues concerning loss........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[3365]
14.12.1. S&P and ABN Amro’s submissions – the councils........ ........ ........
[3365]
14.12.2. S&P and ABN Amro’s submissions – LGFS........ ........ ........ ........ ..
[3384]
14.12.3. The councils’ submissions in response........ ........ ........ ........ ........ ....
[3394]
14.12.4. LGFS’s submissions in response........ ........ ........ ........ ........ ........ .....
[3409]
14.12.5. Discussion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[3416]
14.13.. S&P and ABN Amro cross-claims against LGFS........ ........ ........ ........ ........ .
[3469]
14.14.. S&P and ABN Amro cross-claims against each other........ ........ ........ ........ ..
[3471]
14.14.1. The claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[3471]
14.14.2. Discussion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........
[3480]
14.15.. Proportionate Liability........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[3483]
14.15.1. Some preliminary observations........ ........ ........ ........ ........ ........ .......
[3483]
14.15.2. Apportionable damages........ ........ ........ ........ ........ ........ ........ ........ ...
[3486]
14.15.3. LGFS’s case on apportionment........ ........ ........ ........ ........ ........ .......
[3491]
14.15.3.1... StateCover settlement........ ........ ........ ........ ........ ........ .....
[3491]
14.15.3.2... Councils’ claims........ ........ ........ ........ ........ ........ ........ ......
[3493]
14.15.4. S&P’s case on apportionment........ ........ ........ ........ ........ ........ ........ .
[3507]
14.15.5. ABN Amro’s case on apportionment........ ........ ........ ........ ........ ......
[3509]
14.15.6. Discussion – apportionment........ ........ ........ ........ ........ ........ ........ ....
[3517]
15....... THE INSURANCE CASE BETWEEN LGFS AND AHAC........ ........ ........ ........ ...
[3533]
15.1.... The dispute between LGFS and AHAC........ ........ ........ ........ ........ ........ ........
[3533]
15.2.... The contract of insurance........ ........ ........ ........ ........ ........ ........ ........ ........ ......
[3537]
15.3.... The derivatives issue – duty of disclosure?........ ........ ........ ........ ........ ........ ...
[3546]
15.3.1. The Rembrandt notes – not a debenture but a derivative........ ........ ..
[3546]
15.3.2. Statutory provisions........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[3547]
15.3.3. AHAC’s case........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[3551]
15.3.4. LGFS’s case........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[3573]
15.3.5. Discussion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[3614]
15.4.... Insurance contract defences........ ........ ........ ........ ........ ........ ........ ........ ........ ...
[3635]
15.4.1. Outline of defences........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[3635]
15.4.2. No wrongful act........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .
[3636]
15.4.3. Endorsement 17 – not authorised under AFSL........ ........ ........ ........ ..
[3646]
15.4.4. Endorsement 17 – conflict of interest........ ........ ........ ........ ........ ........
[3661]
15.4.5. Endorsement 16 – proprietary trading........ ........ ........ ........ ........ .......
[3665]
15.5.... StateCover settlement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....
[3679]
15.5.1. AHAC’s case........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[3679]
15.5.2. LGFS’s case........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[3697]
15.5.3. Discussion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..
[3712]
15.5.4. Conclusions about AHAC’s defences........ ........ ........ ........ ........ .......
[3720]
15.6.... AHAC’s cross-claim........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....
[3721]
16....... CONCLUSIONS........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......
[3722]
REASONS FOR JUDGMENT
1. INTRODUCTORY OBSERVATIONS
1.1 The matter generally
In 2006 ABN AMRO Bank NV (ABN Amro) created a new financial product known as the constant proportion debt obligation or CPDO. ABN Amro retained Standard and Poor’s (S&P), a ratings agency, to rate the CPDO and sought a rating of AAA for the CPDO. S&P issued a rating of AAA for the CPDO. Later in 2006 ABN Amro decided to market CPDOs in other currencies including the Australian dollar (AUD). The two series of CPDOs marketed in Australia were known as Rembrandt 2006-2 and Rembrandt 2006-3.
Local Government Financial Services Pty Limited (LGFS) caused its client StateCover Mutual Limited (StateCover), a workers’ compensation insurer providing such insurance for employees of councils in New South Wales, to purchase $10,000,000 of the Rembrandt 2006-2 notes. LGFS then purchased $40,000,000 (later increased by another $5,000,000) of the Rembrandt 2006-3 notes for the purpose of on-sale to councils in New South Wales. Between November 2006 and July 2007 LGFS sold $17,000,000 of the Rembrandt 2006-3 notes to the 13 councils which are parties to these proceedings (it also sold the notes to two other councils in New South Wales which are not parties to these proceedings). LGFS retained some $26,000,000 of the Rembrandt 2006-3 notes.
In October 2008 the Australian CPDOs cashed out because their net asset value fell below 10% of the par price for which they had been acquired and the terms of the instruments creating the notes provided for them to cash-out in that event and for a cash-out payment to be made to the noteholders which, after various deductions, amounted to about 6% of the principal amount they paid. By reason of the cash-out StateCover suffered an alleged loss of $9,244,000 in respect of the Rembrandt 2006-2 notes and the councils suffered alleged losses totalling nearly $16,000,000 in respect of the Rembrandt 2006-3 notes. LGFS alleges also that it suffered losses of nearly $16,000,000 in respect of its holding of the Rembrandt 2006-3 notes which it had to sell some seven months before the notes cashed out when S&P downgraded the rating of the notes from AAA to BBB+ and LGFS could no longer hold the notes on its balance sheet consistently with its investment requirements and so as to maintain its own rating from S&P. LGFS sold the notes to its parent company, Local Government Superannuation Scheme Pty Limited or LGSS, at their then published net asset value which was around 65% below par.
StateCover and the councils sued LGFS, S&P and ABN Amro on account of their losses. LGFS settled StateCover’s claim against it in the sum of $3,175,000 ($2,700,000 together with costs of $475,000). This settlement also settled StateCover’s claims against S&P and ABN Amro.
The claims of the councils against LGFS, S&P and ABN Amro remain to be resolved as part of these proceedings. For its part, LGFS sued both ABN Amro and S&P on account of its payment to StateCover to discharge StateCover’s claims against LGFS, S&P and ABN Amro, LGFS’s own losses incurred on sale of the Rembrandt 2006-3 notes to its parent company LGSS, and any liability that LGFS might be found to have to the councils in respect of their claims against LGFS.
In addition, because LGFS’s insurer, American Home Assurance Company (AHAC), denied LGFS cover for the StateCover settlement and the claims of the councils, LGFS sued AHAC for indemnity under its insurance policy.
LGFS, ABN Amro, S&P and AHAC all deny liability and have raised various defences and cross-claims to the claims against them. The cross-claims include not only those of LGFS against S&P and ABN Amro but also those of S&P and ABN Amro against each other and of AHAC against LGFS for the repayment of defence costs already paid.
Issues of contributory negligence are raised against the councils and LGFS by S&P and ABN Amro. Issues of proportionate liability are raised between LGFS, S&P and ABN Amro in respect of claims against and between them other than the claims of AHAC which are separate.
1.2 The councils’ claims
Other than Bathurst Regional Council (Bathurst) the councils are commonly represented. Despite some differences in the formulation of the claims between Bathurst and the other councils (including an unconscionable conduct claim by Bathurst against LGFS), the claims may be described together.
The councils against LGFS: leaving aside the different formulations of Bathurst’s claims, the councils bring five principal claims against LGFS: – (i) the misleading and deceptive conduct claims, (ii) the negligence claims, (iii) in respect of two of the councils, Cooma and Corowa, the contract claims, (iv) the unlicensed to deal claim, and (v) the fiduciary duty claim. Bathurst also brings a claim for restitution based on an allegation that councils were not permitted to invest in the Rembrandt product, a claim which the other councils make in the alternative only to their primary case that Rembrandt was a permissible investment for the councils to make. The remedies sought for the unlicensed to deal claim and the fiduciary duty claim include rescission of the councils’ agreements to purchase the Rembrandt notes with associated restitution and equitable compensation. The remedies sought for the other claims are damages.
The councils against S&P: the councils make two principal classes of claims against S&P. The claims are described as: – (i) the misleading and deceptive conduct claims, and (ii) the negligence claims. The remedies sought are damages.
The councils against ABN Amro: the councils make three principal classes of claims against ABN Amro. The claims are described as: – (i) the misleading and deceptive conduct claims, (ii) the knowing involvement in S&P’s misleading and deceptive conduct claims, and (iii) the negligence claims. The remedies sought are damages.
1.3 LGFS’s claims
LGFS against S&P: LGFS makes two principal classes of claims against S&P. The claims may be described as: – (i) the misleading and deceptive conduct claims, and (ii) the negligence claims. The remedies sought are damages.
LGFS against ABN Amro: LGFS makes three principal claims against ABN Amro. The claims may be described as: – (i) the misleading and deceptive conduct claims, (ii) the negligence claims, and (iii) the contract claims but only in respect of the Rembrandt 2006-3 notes. The remedies sought are damages.
1.4 S&P’s claims
S&P’s claims against ABN Amro only arise if it is found liable to LGFS and/or the councils. In that event S&P brings proportionate liability claims against ABN Amro as a concurrent wrongdoer.
1.5 ABN Amro’s claims
ABN Amro’s claims against S&P only arise if it is found liable to LGFS and/or the councils. In that ABN Amro event brings proportionate liability claims against S&P as a concurrent wrongdoer.
1.6 The insurance case
LGFS claims that AHAC is liable to indemnify LGFS for any liability it has in respect of the claims of the councils and in respect of the StateCover settlement and its defence costs in connection with each. AHAC denies that LGFS has any right to indemnity under the contract of insurance on various grounds and seeks repayment from LGFS of the defence costs already paid.
1.7 These reasons
Parts 2 to 9 of these reasons deal with documentary and witness evidence. In these parts I have emphasised some statements in bold which are material to findings in the subsequent parts of these reasons. It should be assumed that such emphasis is mine unless it involves a heading or definition in a document or I otherwise indicate to the contrary.
Parts 2 to 9 of these reasons also contain some observations and conclusions. It should be understood that these observations and conclusions have been included on the basis of the more detailed discussion and findings that appear in parts 10 to 15 of these reasons.
Immaterial typographical and grammatical errors in some of the documents and evidence have been corrected for convenience.
2. DEFINITIONS
In these reasons for judgment certain abbreviations are used where convenient. The following list of terms provides guidance on the meaning of the abbreviations, although meaning is ultimately governed by the context in which the terms are used.
It should also be noted that, due to the context, it has not always proved convenient to use the abbreviation and some other term is used instead.
As such, the following should be used as a guide only.
2000 ISDA Definitions means a document intended for use in confirmations of individual credit default swap transactions governed by agreements such as the ISDA Master Agreements.
2001 LGFS presentation means the document entitled “Delivering the goods for Councils” presented by LGFS at a Local Government Association conference in 2001.
2003 ISDA Credit Derivatives Definitions means a document setting out definitions intended for use in confirmations of individual credit default swap transactions governed by agreements such as the ISDA Master Agreements.
AASB 139 means Australian Accounting Standards Board 139: Financial Instruments: Recognition and Measurement.
ABN Amro means ABN AMRO Bank NV. Also referred to by some of the parties as ABN.
ABN Amro draft term sheet means a draft version of the ABN Amro term sheet provided to LGFS on or about 24 October 2006.
ABN Amro final term sheet means the final version of the ABN Amro term sheet provided to LGFS on or about 9 January 2007.
ABN Amro term sheet means the document created by ABN Amro containing an overview of the CPDO notes and the general terms and conditions which applied to the CPDO notes and may include the ABN Amro draft term sheet and the ABN Amro final term sheet.
The ABN Amro information means the following information:
Key Risk Factors
Credit Risk
•Investors are exposed to the credit risk of the underlying credit portfolio.
•In case of defaults or spread widening, the Note NAV will be negatively affected and the size of the credit portfolio may be increased or reduced.
•Leverage may increase the magnitude of losses.
•The Note is not guaranteed by ABN AMRO. CPDO is not a principal protected note. Actual amounts of interest and principal paid on the notes are subject to the investment strategy performance.
Price Volatility
•The NAV of the note is sensitive to credit spreads of the underlying portfolio of index swaps.
•The price of the notes may be lower than the initial purchase price.
•The traded price may be different from the NAV of the notes due to supply and demand issues.
•Leverage may increase the magnitude of price volatility.
Cash-Out Event
•If the NAV falls to 10% or lower, a “cash-out” event will be triggered and the credit portfolio is fully unwound.
•No coupon will be paid after a cash-out event and any recovered value will be paid to noteholders.
Performance and modelling risk
•Past performance may not be representative of future performance.
•Current modelling assumptions are unlikely to be consistent with actual performance of CPDO.
•Key modelling assumptions are set out in S&P base case assumption.
The ABN Amro Surf presentation means a marketing presentation prepared by ABN Amro about the CPDO intended to be provided to ABN Amro clients. Also identified as the Surf marketing presentation or ABN Amro presentation or by similar descriptions.
AFSL means Australian financial services licence.
AHAC means American Home Assurance Company.
Amending Deed means a deed dated 8 January 2007 amending the Issue Notice and the Swap Confirmation to reflect the issue of further notes.
Anti-DPN means a new product developed by ABN Amro which became the CPDO.
APRA means the Australian Prudential Regulation Authority.
ASIC Act means the Australian Securities and Investments Commission Act 2001 (Cth).
AUD means Australian dollars.
Bathurst means Bathurst Regional Council.
BBSW means the Bank Bill Swap Rate, a reference rate based on the interest rates at which banks borrow unsecured funds.
bps means basis points, generally used to describe percentage changes in prices. One basis point or bp is equivalent to 0.01%.
Castle means a series of ABN Amro CPDOs.
CDO means collateralised debt obligations, another structured financial product, being a different product from the CPDO.
CDOE or CDO Evaluator means a model described in a document published by S&P on 19 December 2005 entitled ‘CDO Evaluator Version 3.0: Technical Document’ which describes the model as a ‘portfolio credit risk model for analysis of CDO transactions.’
CDS means a credit default swap contract, or a contract relating to credit default risk. A typical CDS involves one party (the protection seller) selling to another party (the protection buyer) protection against the risk of a credit event. CDSs may be actual or notional.
CDS default payment means the sum paid by the protection seller to the protection buyer on the occurrence of a credit event (see CDS above).
CDS premium fee means the fee paid by the protection buyer to the protection seller for protection against the risk of a credit event (see CDS above).
CDX means the CDX North America Investment Grade Index, which references US credit default swaps.
Chess means the first issue of CPDOs by ABN Amro in Euros, USD and Japanese Yen. It was the first CPDO rated by S&P.
CIR means the Cox, Ingersoll and Ross process, a mean reverting process used in modelling.
Community income notes is a reference to the Rembrandt 2006-3 notes which LGFS purchased and sold to the councils. LGFS named these notes “community income notes” and referred to them as such in its dealings with councils.
Cooma means Cooma-Monaro Shire Council.
Corowa means Corowa Shire Council.
CPDO means constant proportion debt obligation and is the name given to the new financial product developed by ABN Amro in 2006. CPDO notes were issued in series by special purpose vehicles under names including Castle, Chess, and, in Australia, Rembrandt.
CPDO Evaluator means a mathematical tool for modelling CPDOs and rating CPDO index transactions. The model was developed by S&P and launched on 22 March 2007.
CPDO letter means a standard form letter prepared by LGFS entitled “CPDO – The Next Generation” designed to introduce the CPDO to councils.
CPPI means constant proportion principal insurance, another financial product which pre-dated the CPDO. An ABN Amro DPN is a type of CPPI.
CRI means Committed Rolling Investment, an investment product provided by LGFS to councils from 2002 or 2003. It provided a floating rate of return and constituted a series of term deposits joined together to provide an investment with a longer term.
DBRS means DBRS Limited, a ratings agency.
Deed of Amendment means a deed dated 8 October 2003 and issued by Perpetual and ABN Amro as an annexure to the Supplemental Deed.
Deed of Charge means a deed dated 21 February 2001 which provided for the trustee to charge the secured property to the security trustee to secure the payment of the secured money. The Master Trust Deed made provision for the Deed of Charge to be created over the trust assets.
Deniliquin means Deniliquin Shire Council.
Department or DLG means the New South Wales Department of Local Government.
DLG 2006 circular means a circular issued to all councils by the Director-General of the Department of Local Government on 27 November 2006.
DPN means Dynamic Participation Note, ABN Amro’s CPPI product.
ECD Group means ABN Amro’s London based Exotic Credit Derivatives Group, responsible within ABN Amro for structuring, trading and marketing structured credit products such as CDOs and CPPIs.
FIIG means FIIG Securities Ltd, a firm which provided financial products to various councils.
Fitch means Fitch Ratings, a ratings agency.
FRN means a floating rate note, another financial product.
FuturePlus means FuturePlus Financial Services Pty Ltd, the head of the company group of which LGSS and its subsidiary LGFS formed part after LGSS’s acquisition of LGFS in October 2004.
Globoxx means the Globoxx Index, which is made up of the CDX and iTraxx weighted 50% each.
Grange Securities means Grange Securities Ltd, a firm which sold CDOs to councils.
The Grove report means a report issued by Grove Research and Advisory about the Rembrandt CPDO dated 16 November 2006.
HJM means the Heath-Jarrow-Morton process, used to model interest rate movements.
IMB means Illawarra Mutual Building Society, an institution in which some councils invested.
IMP means an individually managed portfolio service, a facility offered by Grange Securities to councils which had acquired CDOs.
Investment guidelines means the investment guidelines referred to in a circular issued to all councils by the Director-General of the Department of Local Government on 29 November 2000.
ISDA means the International Swaps Dealers Association, which published a standard form contract for credit default swaps.
ISDA Master Agreement means an agreement dated 26 June 2002 governing credit default swap transactions.
Issue Notice means a notice from Perpetual in its capacity as trustee of the Rembrandt Australia Trusts confirming the issue of the “Community Income Constant Proportion Debt Obligation Notes” or the Rembrandt 2006-3 notes.
iTraxx means the iTraxx Europe Index, which references European corporate default swaps.
JULI means the JP Morgan US Liquid Index.
Kappa is a reference to an integer used in the modelling of certain financial products including the CPDO, being the assumed mean reversion speed or MR of credit spreads on the referenced indices.
LGFS means Local Government Financial Services Pty Limited.
Local Government Act means the Local Government Act 1993 (NSW).
Local Government Best Practice Guide means a draft document prepared by two industry bodies, Local Government Financial Professionals and Local Government Managers’ Association.
LGFS community income notes brochure means a brochure prepared by LGFS in order to market the community income notes (or the Rembrandt CPDO or Rembrandt 2006-3 notes) to councils.
LGFS corporate profile means a document prepared by LGFS in or about May 2004, which was provided to some of the councils.
The LGFS information means:
(1)LGFS was entitled to earn a substantial fee or commission on the sale of Rembrandt to the council;
(2)LGFS was under a mandate with ABN AMRO to assist in the promotion of the product;
(3)LGFS had arranged the structuring and creation of Rembrandt by ABN AMRO for LGFS to sell to local councils as it was concerned that it was losing market share of councils’ invested funds by not offering higher yielding financial products similar to those offered by LGFS’ competitors such as collateralised debt obligations (CDOs) to local councils.
(4)LGFS had acquired the entire tranche of Rembrandt from ABN AMRO in the amount of $40,000,000 and had an interest in liquidating a portion or a substantial portion of its own holdings because;
(a)to the extent LGFS was not able to sell Rembrandt, it was exposed to the risks of losses on those Notes it continued to hold;
(b)those risks included certain risks associated with Rembrandt that have been identified in these proceedings, but which were not disclosed at the time LGFS marketed Rembrandt to the council;
(5)LGFS had received a report prepared by Grove Research and Advisory which identified substantial risks associated with Rembrandt which were not disclosed to the council officers by LGFS;
(6)LGFS held the view that Rembrandt was a grotesquely complicated product;
(7)LGFS was aware that in the period prior to LGFS’s marketing of the product to the councils there had been negative movements in the credit spreads in the two indices which was likely to have an adverse effect on the future performance of Rembrandt;
LGFS may have had a conflict of interest in Rembrandt by reason of the matters referred to in 1 to 7 above.
LGSS means the Local Government Superannuation Scheme owned by FuturePlus.
LIBOR means the London Interbank Offered Rate, a reference rate based on the interest rates at which banks borrow unsecured funds.
LSS means the leveraged super senior product, a financial product developed by ABN Amro and which S&P had rated before it rated the CPDO.
LTAS means the long-term average spread of the indices referenced by the financial product, in the case of the CPDO the Globoxx index (the combined iTraxx and CDX indices weighted 50% each).
LTM is the long-term mean of the credit spreads of the referenced indices and is another way of referring to LTAS.
Mandate Letter means the contract between ABN Amro and LGFS made in October 2006 in respect of the Rembrandt 2006-3 notes.
Master Definitions Schedule means a schedule dated 15 February 2001 which set out meanings for certain terms used in transaction documents (including the Master Trust Deed).
Master Security Trust Deed means a deed dated 15 February 2001 which provided that the security trustee (Perpetual) of each security trust would act as trustee for the secured creditors and hold the benefit of the charge on trust for the secured creditors and otherwise act in accordance with the deed and the relevant deed of charge. This deed applied to each trust established pursuant to the Master Trust Deed.
Master Trust Deed means a deed dated 15 February 2001 intended to provide for the possible future establishment of trusts. The trustee (Perpetual) and the trust manager (ABN Amro) agreed to act as trustee and trust manager respectively on the terms and conditions set out in this deed.
Ministerial order means an order made by the Minister for Local Government and amended from time to time specifying the forms of investment in which a council may invest, pursuant to s 625(2) of the Local Government Act.
ML means Merrill Lynch, which (insofar as relevant) published financial information.
Moody’s means Moody’s Investors Service Inc, a ratings agency.
Moree means Moree Plains Shire Council.
MR means mean reversion speed, the speed with which credit spread levels are expected to return to their average level after a period where they deviated from the historically observed mean (see kappa above).
Murray means Murray Shire Council.
Narrandera means Narrandera Shire Council.
Narromine means Narromine Shire Council.
NAV means net asset value.
Notice of Creation of Trust means a document dated 18 February 2004 giving notice of the creation of a trust under the Master Trust Deed to be known as Rembrandt Australia Trust 2004-6.
Oberon means Oberon Shire Council.
Orange means Orange City Council.
Parkes means Parkes Shire Council.
Perpetual Trustee or Perpetual means Perpetual Trustee Company Limited, the trustee of the Rembrandt Trust, the special purpose vehicle used by ABN Amro for the Rembrandt CPDOs.
Prudent person approach, standard or requirement means the approach outlined in the investment guidelines for councils, namely that “a council or entity acting on its behalf should exercise the care, diligence and skill that a prudent person would exercise in investing council funds. A prudent person is expected to act with considerable duty of care, not as an average person would act, but as a wise, cautious and judicious person would.”
RAMP means rating analysis meeting paper, a report by a primary analyst used in S&P committee meetings to assist in determining what rating should be assigned to a product.
RBD means roll-down benefit, an assumed benefit arising from upward sloping credit spread term structures.
RBS means Royal Bank of Scotland, which acquired ABN Amro.
Rembrandt notes or Rembrandt product or Rembrandt CPDO means the Australian issue of ABN Amro’s CPDO, being Rembrandt 2006-2 and Rembrandt 2006-3.
Rembrandt 2006-1 refers to the CPDO notes issued in New Zealand dollars.
Rembrandt 2006-2 is the name given to the first issue of the CPDO notes in Australia, relevantly, the subject of the purchase by StateCover.
Rembrandt 2006-3 is the name given to the second issue of the CPDO notes in Australia, also referred to by LGFS and the councils as community income notes, relevantly, the subject of the purchase by LGFS and on-sale of part thereof to the councils.
The Right Balance means an investment management strategy designed by LGFS and aimed at councils.
The Right Balance agreement means the agreement offered by LGFS to some of the councils and into which two councils entered (Cooma Monaro Shire Council and Corowa Shire Council).
The Right Balance brochure means a brochure describing LGFS’s Right Balance service provided to some councils in or about 2005.
The Right Balance letter means a standard form letter prepared by LGFS designed to accompany the Right Balance brochure sent to some councils in late 2005 and 2006 in respect of the Right Balance service.
Ryde means Ryde Council.
S&P means Standard & Poor’s, a division of McGraw Hill International (UK) Limited, a ratings agency.
S&P report means either the S&P report 2006-2 or the S&P report 2006-3, insofar as there are no material differences between the two.
S&P report 2006-2 means a pre-sale report published by S&P on 11 August 2006 for Rembrandt 2006-2. It is called a pre-sale report because the Rembrandt 2006-2 notes were issued on 5 September 2006, after the publication of this report.
S&P report 2006-3 means a post-sale report published by S&P on 16 November 2006 for Rembrandt 2006-3. It is called a post-sale report because the Rembrandt 2006-3 notes were issued on 31 October 2006, before the publication of this report.
SCM Group means ABN Amro’s Structured Credit Marketing Group.
Sigma means volatility, used in the modelling of certain financial products including the CPDO. Also referred to as vol.
Spread means the difference between the offer price and the bid price charged on a credit default swap as between the protection buyer and protection seller.
SPV means a special purpose vehicle such as the Rembrandt Trust vehicles. The Rembrandt Trust vehicles issued the CPDO notes to investors at the direction of ABN Amro.
StateCover means StateCover Mutual Limited.
Supplemental Deed means a deed dated 21 February 2001 and which contained terms applying to each trust established under a Notice of Creation of Trust referring to the Supplemental Deed.
Surf is the generic name given by ABN Amro to its CPDO product.
Swap Confirmation means a letter confirming the terms and conditions of the swap transaction entered into between ABN Amro London and Perpetual in its capacity as trustee of the Rembrandt Australia Trust 2006-3 on 18 October 2006.
Transfer and acceptance form means the form executed by the councils (except Bathurst) to complete the transfer of the Rembrandt notes.
3. KEY DOCUMENTS
LGFS provided fund management services to StateCover in accordance with an agreement embodied in a letter of arrangement between LGFS and StateCover of 14 September 2004. By that agreement LGFS was to implement StateCover’s investment policy which prohibited StateCover from investing in derivatives. In its claims against LGFS StateCover alleged, amongst other things, breach of contract.
AHAC submitted that LGFS’s liability to StateCover is a contractual liability within the scope of the exclusion in cl 3.3. In the absence of that contract that liability would not have attached to LGFS. AHAC also submitted that:
It is well established that if there are two proximate causes of a loss, one within the scope of the policy and the other falling within the exclusion clause, the insurer has no liability to indemnify (See Wayne Tank and Pump Co. Ltd v Employers Liability Assurance Corporation Ltd (1974) QB 57 at 69, 74; City Centre Cold Store Pty Ltd v Preservatrice Skandia Insurance Ltd (1985) 3 NSWLR 744; QBE Insurance Ltd v Shoobridge (2011) 11 ANZIC 61-495; Derrington and Ashton “The Law of Liability Insurance” 2nd Edition p.804.
Accordingly, AHAC said “if the liability of LGFS arises from two matters, one of which is the subject of an express exclusion under the Policy, AHAC is not required to indemnify it. That is this case”.
AHAC also submitted that StateCover’s other claims were “parasitic upon the contractual obligations” and could succeed only “because of the existence of the contractually assumed liabilities”.
AHAC also challenged the reasonableness of the settlement of StateCover’s claims. Insofar as StateCover claimed that LGFS was liable to it for failing properly to investigate and consider Rembrandt’s appropriateness for StateCover, and failing to advise StateCover of the risks associated with Rembrandt, AHAC submitted that:
… there is no alleged term of either of the agreements that LGFS was obliged to advise StateCover with respect to risks associated with any investment. There is no evidence that, in the absence of a policy prohibiting investment in derivatives by StateCover, the purchase of the Rembrandt Notes was not properly regarded, as at the date of that purchase, as an investment appropriate for StateCover. If the investment is said to be inappropriate because it was made in breach of the Investment Policy prohibiting derivatives, then that claim too is parasitic on the contractual claim caught by Exclusion 3.3 in the Policy.
According to AHAC, the “evidence does not support a contention that the Rembrandt Notes were an inappropriate investment product for StateCover in the absence of the Policy prohibition”.
As to StateCover’s claim against LGFS for misleading and deceptive conduct, AHAC said those claims “are again interrelated with and parasitic upon the terms of the contract requiring adherence to the Investment and Risk Policies”. The representations are that Rembrandt was a sound investment and appropriate for StateCover’s portfolio and that LGFS had a proper understanding of the nature of Rembrandt. AHAC submitted that:
As to the second of those representations, the evidence is that LGFS did properly understand the nature of the Rembrandt Notes. The representation was not false. As to the first, there is no evidence that, in the absence of the policy prohibition, an investment adviser for StateCover properly understanding the risks of the Rembrandt Notes as at 2006 would not have regarded them as a sound investment and appropriate for StateCover’s portfolio. The consequence is that those aspects of the misleading conduct claim…were highly likely to fail.
AHAC noted that LGFS must prove that the settlement was reasonable judged objectively, based on the material which was available to it at the time of the settlement (Unity Insurance Brokers Pty Ltd v Rocco Pezzano Pty Ltd (1998) 192 CLR 603; [1998] HCA 38 at 653 per Hayne J). AHAC said that the question is – was it reasonable for LGFS to pay the settlement sum in respect of those particular aspects of the absence of due care and skill and misleading conduct claims which do not relate to breach of the Risk and Investment Policies and breach by LGFS of the conditions of its licence?
AHAC submitted that LGFS had not proved the settlement sum was reasonable. According to AHAC LGFS’s evidence as to its prospects of success in defending StateCover’s proceeding and belief that it would be indemnified by AHAC in any event demonstrates that the settlement was not reasonable. AS AHAC put it:
The reasoning process, explicitly identified in the documentary material of LGFS, was that it was a good idea for LGFS to settle at the nominated figure, not because there was any analysis of exposure to risk, but because AHAC would be liable to pay the sum, whatever it was, to LGFS. That process of reasoning demonstrates that the settlement was not reasonable. It was, at best, cynical.
This prompted AHAC’s submission that:
If the settlement was a result of the Insured not acting in good faith towards the insurer or a settlement in which the insurer’s interests were sacrificed, then the settlement is not reasonable (see e.g. The Distillers Co Bio-Chemicals (Aust) Pty Ltd v Ajax Insurance Co Ltd (1973-74) 130 CLR 1 at 30 per Stephen J; Broadlands Properties Ltd v Guardian Assurance Co Ltd (1984) 3 ANZ Ins Cases 60-552 at 78, 323 – 78, 325; Sutherland – “An Uneasy Compromise: An Analysis of the Effect of a Settlement reached by an Insured with a Third Party Claimant vis a viz his or her Insurer” (1998) 9 Insurance Law Journal 1 at 19-21).
To this end AHAC referred to the briefing note to LGFS’s board of 24 May 2011 from its solicitors which said:
If Chartis is willing to make a contribution to the StateCover settlement amount, LGFS would need to be prepared to pay the balance of the settlement amount without recourse to indemnity from the insurer... Even though LGFS would still seek to recover from S&P and ABN AMRO contribution to or indemnity for the amount it would have to pay, we would not recommend proceeding with this course (and releasing Chartis from the claim in relation to StateCover) unless Chartis is prepared to make a substantial contribution (ie around $2,500,000).
For present purposes the references to Chartis can be understood as references to AHAC.
LGFS’s solicitors also advised it that there is a risk that LGFS will only be able to recover a proportion (rather than the whole) of the settlement sum from ABN Amro and/or S&P, the risk of making no recovery from ABN Amro or S&P is low, and LGFS’s prospects of obtaining an order that AHAC indemnify it in respect of the settlement sum are strong.
Mr Lambert gave evidence that LGFS was advised it had a very strong case and very strong prospects of success in defeating the StateCover claims and its prospects of success with respect to the proportionate liability defence concerning S&P were very strong and if that proportionate liability defence succeeded S&P would pay 100% of the loss. The essence of LGFS’s reasons for the StateCover settlement are disclosed in the circular Mr Lambert prepared saying:
From the perspective of a lay person involved in the case I believe that this settlement should be accepted, because it effectively decreases the ‘worst case’ scenario from a $10 million loss to a $3 million loss without changing the expected outcome of $0 cost to LGFS. This expected outcome assumes that we may recover some or all of this payment from ABN AMRO and/or S&P. Any balance remaining would be recoverable under the Insurance Policy should the Court rule in our favour in that matter.
AHAC also relied on this evidence from Mr Lambert:
“Was your approach to settlement of this, Mr Lambert, ‘we can pay this $3 million because we’ll pick it up from the insurer come what may’?....Come what may, yes.”
AHAC submitted that:
There is no evidence to support the objective reasonableness of the settlement of claims based on the lack of due care and skill and misleading conduct claims. To the extent that there is evidence of the legal advice given to LGFS it was that LGFS had very strong prospects of successfully defending the claim by StateCover against it. The reasoning process of LGFS is exposed in the summary referred to above and the answer by Mr Lambert. It can accurately be said that the approach of LGFS was - it doesn’t matter how much we pay or whether that sum relates to our exposure to liability, because the insurer will pay for it in due course. That involves a complete absence of good faith; an absence of reasonableness. Having failed to discharge the onus of proving that the settlement is reasonable, the LGFS claim with respect to the StateCover Proceedings must fail.
15.5.2LGFS’s case
LGFS said that the relevant background involves the following:
At the start of September 2006 StateCover bought Rembrandt 2006-2 notes with a face value of $10,000,000. In its capacity as funds manager, LGFS caused StateCover to buy the Rembrandt 2006-2 notes. As with the Rembrandt 2006 3 notes, the Rembrandt 2006 2 notes “cashed out” resulting in a return to StateCover of slightly under 7 cents in the dollar. That is, StateCover suffered a loss slightly exceeding $9,300,000.
In the StateCover proceedings, StateCover claimed damages for that loss, together with interest from November 2008 (at the New South Wales Supreme Court rate, that interest was accruing at over $800,000 per annum) and costs. Initially that claim was only against LGFS. After LGFS pleaded a proportionate liability defence, StateCover joined S&P and ABN as respondents in those proceedings. LGFS settled the claim by paying $2,700,000 plus agreed costs of $475,000.00 to StateCover . StateCover’s claims against each of LGFS, ABN and S&P were dismissed by consent. LGFS claims from AHAC the full amount of the settlement $3,175,000.00, together with an indemnity for its “Defence Costs” attributable to the claim by StateCover. LGFS also seeks an order for the costs of the cross claim against AHAC, and that AHAC’s cross claim against LGFS be dismissed with costs.
Insofar as it might be relevant I accept LGFS’s submission relevant to the non-disclosure case against it (rejected on other grounds) that, as to the $6,000,000 of Rembrandt 2006-2 notes which were transferred directly from Perpetual Trustee to StateCover, LGFS did not deal (as defined by s 766C of the Corporations Act) in those notes. I have greater difficulty in accepting the proposition that LGFS also did not deal in the remaining $4,000,000 of the notes which it acquired and transferred to StateCover merely because LGFS was acting as StateCover’s agent. But I have rejected the argument on other grounds and thus the difficulties this argument presents are immaterial. It is also the case that LGFS had no conflict of interest in its dealings with StateCover. As LGFS said LGFS did not receive a commission and had no interest in the purchase of the Rembrandt 2006-2 notes by StateCover, and did nothing more than perform its function as funds manager.
As to cl 3.3, LGFS submitted that AHAC has the onus of proving that the loss is within this exclusion. AHAC sought to do so by a high-level and inaccurate analysis of StateCover’s claims against LGFS which LGFS described as inadequate. LGFS said that AAHC’s arguments should be rejected for five reasons.
First, the investment by StateCover in the Rembrandt 2006-2 notes was made in early September 2006. At that time the contract between LGFS and StateCover was recorded in the letter between LGFS and StateCover dated 14 September 2004. A subsequent agreement dated 4 April 2007 (the “Outsourcing Agreement”) was not entered into until 4 April 2007, long after the StateCover investment in the Rembrandt 2006-2 notes had been made. The question is whether LGFS as funds manager of StateCover would have been liable to StateCover in the absence of the relevant promise in the 14 September 2004 letter.
Second, the promise relied on by StateCover in its pleading and by AHAC appears from the words “in undertaking these functions [i.e. as funds manager] LGFS will comply with the policies and requirements of StateCover” in the 14 September 2004 letter. LGFS had concurrent duties in contract and tort. In tort LGFS owed a duty to exercise reasonable care to comply with StateCover’s policies (or perhaps not to cause loss by acting in breach of those policies). If LGFS was liable to StateCover in contract LGFS was clearly liable to StateCover in tort, and certainly it is not shown that LGFS would not be liable to StateCover in tort. StateCover also pleaded that a term was implied into the 14 September 2004 letter by s 12ED of the ASIC Act which is not an obligation arising under “any contract or agreement”. StateCover’s purpose was to hold investments approved by APRA and, as Mr Hilder described in evidence and knew, APRA did not allow StateCover to hold “derivatives”. Clause 3.3 consequently does not operate to exclude LGFS’s claim against AHAC as the liability would have attached to LGFS absent the contract, namely by operation of the ASIC Act.
Third, each of the elements of the StateCover’s claim were pleaded as a breach of an express term, and a failure to competently advise (i.e. a breach of a duty of care) so that each way StateCover put its case, if successful, would have succeeded at law irrespective of the breach of contract.
Fourth, AHAC’s submissions characterising StateCover’s case as not being a failure to advise case (in the sense that it is submitted by AHAC that there was no pleaded obligation to advise) is wrong. In circumstances where StateCover pleaded a duty to provide “investment management services with due care and skill” and pleaded a breach including a failure to advise and a failure to properly investigate, AHAC’s submission misstates the effect of the statement of claim in the StateCover proceedings.
Fifth, AHAC appears to argue that the balance of the claim brought by StateCover, other than the breach of contract claims, would not have succeeded. There is no analysis in AHAC’s submissions of the evidence said to support that submission. LGFS said:
That there was a reasonably arguable claim by StateCover is also demonstrated by the fact that the applicant councils’ claim has already taken over 10 weeks at trial. StateCover had a stronger claim against LGFS than the applicant councils. StateCover is a mutual insurer which had, at the time, relatively limited resources. Those investments it made had to be balanced between producing income or returns and availability to meet claims, including spikes in claims. In light of (a) the term of the Rembrandt 2006-2 notes compared to StateCover’s liabilities, the illiquidity of the Rembrandt 2006 2 notes (there was no promise by LGFS to buy those notes back, unlike in relation to the 2006-3 notes), the potential fluctuations in the market value of those notes and the risks associated with the Rembrandt 2006 2 notes, (b) the circumstance that LGFS knew precisely what Statecover’s investments were and the demands on its investments were and (c) that LGFS as funds manager made the decision to invest for StateCover, the StateCover breach of duty case was clearly stronger than the applicant councils’ cases. Further, no question of reliance arises as LGFS was the decision maker.
AHAC did not plead the lack of good faith issue and should not be permitted to raise it now. Otherwise whether the StateCover settlement was reasonable is to be determined objectively. As LGFS put it:
Taking into account interest, at the time of the settlement StateCover’s claim against LGFS was about $12,000,000 plus costs, and was increasing as interest accrued on StateCover’s loss. LGFS settled that claim for less than a quarter of that amount, plus agreed costs. At the time of the settlement LGFS was facing the additional exposure of the further costs incurred by StateCover in taking the matter to what has proved to be a three month long trial (which would have been lengthened by the StateCover proceedings). The applicant councils’ claims which have been litigated show that there was a real question to be tried, and for the reasons identified in the previous part of these submissions StateCover’s case against LGFS did not have some of the problems the applicant councils’ cases have. The fact that a complicated and reasonably difficult commercial cause was settled for less than 25 cents in the dollar speaks for itself. The settlement is reasonable.
LGFS also noted in support of this submission the following:
(1)LGFS had the power to (and assumed responsibility to) cause StateCover to acquire and dispose of investments which shows that it owed StateCover a duty of care. That StateCover so comprehensively delegated its investment function to LGFS gives content to the duty of care LGFS owed, and shows the high standard arguably demanded of LGFS.
(2)LGFS caused StateCover to buy the Rembrandt notes early in its due diligence process.
(3)The investment by StateCover in the Rembrandt 2006-2 notes caused a very considerable loss to StateCover.
(4)If the StateCover proceedings had been tried and liability established, the only question in relation to damages was LGFS’s proportionate liability defence. As with the councils’ claims, quantum was not otherwise in issue. The proceedings settled at a point in time when S&P and ABN Amro denied any liability to StateCover and could be expected to continue to do so.
(5)AHAC had explicitly informed LGFS that it should act as if it were a “prudent uninsured”.
(6)The risks of litigation are notorious. While the possibility of LGFS having wholly succeeded in the StateCover proceedings cannot be ignored, neither can the possibility of a complete failure by LGFS. A complete failure by LGFS would have had the consequence that LGFS was liable to StateCover for in excess of $9,300,000 together with interest taking the total liability to well in excess of $12,000,000. LGFS would also have been liable for StateCover’s costs of the lengthy trial in which StateCover was represented by senior and junior counsel as well as solicitors. In the event of a total failure of its defences and cross-claims, LGFS would also have been exposed to the costs of S&P and ABN and its own costs in relation to StateCover’s proceedings. Avoiding that risk, for a payment of about 25% of the then existing claim, was obviously reasonable and commercially prudent.
As to the alleged lack of good faith, it is not permissible for AHAC to run a lack of good faith defence under a non-admission as to the reasonableness of the settlement. Further:
Had the want of good faith case been pleaded, LGFS would have had to consider running the trial of the insurance issues differently. It would have interviewed, proofed and considered calling other witnesses. LGFS would have been entitled to proper particulars to know the case it has to meet. Different documentary evidence may have been adduced. It is too late to raise the argument in closing.
In any event, the briefing note to the board of LGFS by its solicitors culminated in a recommendation, overlooked by AHAC, that the offer made by StateCover, in terms ultimately accepted, “is very attractive, and if the issue described below can be satisfactorily resolved, we recommend that it be accepted”. The issue was that the definition of Civil Liability only covers liability under a judgment and not a sum payable pursuant to a settlement and LGFS wanted to preserve its claim against AHAC. The solicitors gave the same advice in their subsequent letter of 9 August 2011 which also pointed out that that StateCover’s costs already amounted to approximately $615,000.
LGFS said there was no logic to AHAC’s argument that LGFS acted other than in good faith because it considered that it should recover part of the settlement from S&P and ABN Amro. To the contrary:
That LGFS’s potential rights to contribution were considered, and the possibility that there may be no contribution directly adverted to together with advice about the uncertainty of the law on the topic, shows that material considerations were before LGFS when it decided to enter into the settlement with StateCover.
Insofar as LGFS considered that AHAC should be liable under the policy to indemnify LGFS, the relevant issue is the reasonableness of the settlement LGFS in fact reached. LGFS also said:
… there is something unreal to AHAC’s submission that the settlement involved a sacrifice of its interests. AHAC ultimately agreed to treat the settlement as a “Civil Liability” but otherwise maintained all of its other defences. LGFS in paying out StateCover was taking the risk that those defences would prevent recovery. Whether or not LGFS thought its claims against AHAC were strong, that involved risk. It is improbable that LGFS would have paid StateCover over the odds in that circumstance.
LGFS said that to the extent Mr Lambert’s subjective state of mind could be relevant it supports the reasonableness of the settlement and is contrary to AHAC’s bad faith case. Mr Lambert said “I’ve always found it very difficult to get from a legal advice exact probability of success”. According to LGFS, this answer accords with notorious fact and recognises the reality that litigation is uncertain. Apart also from the fact that bad faith was not squarely put to Mr Lambert, LGFS said:
As Mr Lambert said, LGFS settled because “here was a settlement of substantially less than the amount claimed, and it was in our commercial interest to make that settlement”. Objectively that was a reasonable step to take in the circumstances. It was a settlement reached in good faith.
15.5.3Discussion
This is another issue where I find AHAC’s case unrealistic, unsupported by the evidence, and unpersuasive.
AHAC’s approach to cl 3.3 does not accord with the language of the provision. Clause 3.3 is in part an exclusion and in part an exception to an exclusion. The exclusion is the liability which arises out of (etc) a contract or agreement. The exception to the exclusion is the extent to which such liability would have attached in the absence of the contract or agreement. The Wayne Tank principle on which AHAC relies is that “where there are two or more proximate causes for an insurer’s liability, one of which is within an exception to the policy, the insurer is absolved from liability” (QBE Insurance Ltd v Shoobridge (2001) 33 MVR 28; [2000] TASSC 172 (Shoobridge) at [15]). In HIH Casualty & General Insurance Ltd v Waterwell Shipping Inc (1998) 43 NSWLR 601 at 612 (cited in Shoobridge at [15]) the law was said to be that “where there are competing proximate causes and loss from one is insured against and none of the others is expressly excluded, the insured is entitled to recover”.
Contrary to AHAC’s submissions the words “such liability” in cl 3.3 are not a reference to the excluded contractual liability. Those words are part of the exception. They mean the same liability as would have attached irrespective of the contract. The scope of the exclusion is not to be determined without regard to the exception of the exclusion. It is the exclusion as a whole which is relevant. The exclusion as a whole in this case is liability arising from contract but only if the same liability would not have arisen irrespective of the contract. If the same liability would have arisen irrespective of the contract then, by the terms of cl 3.3, there is no exclusion of liability. The so-called Wayne Tank principle cannot operate. This is because in such a case the other cause of liability, be it tort or statute provided it is not breach of contract, is not excluded by cl 3.3 itself. Putting it another way, given the terms of cl 3.3, there is no exclusion of any liability which is the same as the contractual liability if that liability would have arisen irrespective of the contract.
In the present case there were other potential causes of the same liability to which LGFS was exposed in the StateCover proceedings being liability in tort and under statute. Those causes of action were not parasitical to the contract claims. As LGFS said these claims could rise or fall on their merits independently of the contract claims. As a result cl 3.3 was not engaged and the real question is whether the settlement was reasonable.
AHAC’s submissions as to the lack of proof of the reasonableness of the settlement and LGFS’s lack of good faith (assuming, for this purpose, that it can be raised consistent with my approach to pleading points generally, unless real as opposed to theoretical prejudice is apparent) are unconvincing. The fact that LGFS considered, rightly in my view, that it should be indemnified by AHAC is one thing, the reasonableness of the settlement is another. There is nothing at all about the StateCover settlement which suggests in any way that LGFS paid more than it thought reasonable because it also thought it had a good case to get the money back from AHAC. Indeed, given that AHAC had not confirmed the indemnity and told LGFS that it should act as a prudent uninsured the prospect of LGFS paying more than it thought reasonable must be inferred to have been remote indeed.
Similarly, although LGFS thought it had a good defence against StateCover it knew it was involved in what would be difficult and hard fought multi-party litigation, potentially exposing it to far greater liability than the offer it received from StateCover, and decided to accept. It must be inferred that LGFS knew full well that litigation of this kind involves real risks regardless of the supposed strength of the case. And as LGFS said, it did not take much to realise that LGFS would have great difficulty in avoiding a duty of care to StateCover given the wholesale delegation of StateCover’s funds management function to LGFS. Despite LGFS’s advice about its prospects of success, it also would not take much to perceive that a product that LGFS itself described as grotesquely complicated and, at least later in its due diligence, knew was potentially highly volatile might be thought a profoundly unsuitable investment for a body such as StateCover (a workers’ compensation insurer for councils), just as it was for the councils.
AHAC’s submission that there was no evidence to suggest that the risks attached to the Rembrandt 2006-2 Notes made them inappropriate for inclusion in StateCover’s portfolio, independently of the question whether they were derivatives or not, ignores the evidence of what LGFS knew, or at least later found out or should have found out about the product during its due diligence. I have dealt with these matters in the context of the councils but the matters include the grotesque complexity of the product, the product’s potential for high volatility, the fact the product may well trade at very low levels during the term, and the 10 year term when StateCover could request ABN Amro to buy back at least the $6,000,000 it purchased directly but not the $4,000,000 it purchased from LGFS at a value which would be determined by ABN Amro having regard to supply and demand. As I have found in respect of the councils a product with these characteristics could not reasonably be considered suitable for a body such as a council or StateCover irrespective of the AAA rating and LGFS should have known that to be so. There is no inconsistency between this conclusion and the AAA rating at all.
LGFS’s submissions demonstrate why the evidence in this case strongly supports the conclusion that the settlement was reasonable in all of the circumstances with which LGFS was confronted. The submissions to the contrary approach the fanciful and are not at all persuasive having regard to the evidence and the objective facts, including the actual settlement sum compared to the quantum of the claim, leaving aside issues of costs in multi-party litigation.
15.5.4Conclusions about AHAC’s defences
For the reasons given, LGFS’s liability to the councils is a loss within the insuring clause and the exclusions and defences relied on by AHAC do not apply. LGFS is entitled to indemnity for its liability to the councils and its defence costs. Equally, LGFS’s liability under the StateCover settlement is also a loss within the insuring clause and the exclusions and defences relied on by AHAC do not apply. LGFS is entitled to indemnity for its liability under the StateCover settlement and its defence costs.
15.6 AHAC’s cross-claim
It follows from the conclusions above that AHAC’s cross-claim against LGFS for repayment of the defence costs already paid has no basis and must be dismissed.
16. CONCLUSIONS
For the reasons given in the preceding sections I am satisfied that:
(a)the councils’ claims for rescission of the agreements by which they purchased the Rembrandt 2006-3 CPDO notes from LGFS and restitution (both under statute and otherwise) should not be accepted;
(b)leaving aside some aspects of their claims immaterial to their overall entitlement to damages, the councils are each entitled to succeed in their various claims for damages against LGFS, S&P and ABN Amro;
(c)the claims of LGFS, S&P and ABN Amro against the councils for contributory negligence and being largely responsible for their own loss, with the consequence that the damages payable to each council must be reduced, should not be accepted;
(d)the councils have each proved that they suffered loss and damage as required to sustain their claims against LGFS, S&P and ABN Amro, the damage being the amount each paid for the Rembrandt 2006-3 CPDO notes less the amount they received on the cash-out of those notes. No deduction for coupon payments received by the councils should be made;
(e)this is also the proper measure of damages payable to Cooma and Corowa in respect of their breach of contract claims against LGFS;
(f)other than in respect of their claims for equitable compensation from LGFS for breach of fiduciary duty, the councils’ damages claims against LGFS, S&P and ABN Amro attract the various proportionate liability provisions and liability for the councils’ damages should be apportioned as between LGFS, S&P and ABN Amro as to 33⅓% each;
(g)the councils’ claims for equitable compensation from LGFS for breach of fiduciary duty should also be sustained. While this compensation is not apportionable the measure of compensation is the same as the councils’ damages claims;
(h)there is an outstanding issue as to the interest which the councils should receive, ABN Amro having argued that pre-judgment and perhaps post-judgment interest should not exceed the interest which would have been payable had the Rembrandt 2006-3 notes not cashed out and the other parties not having addressed that argument;
(i)LGFS is entitled to succeed in its various claims against ABN Amro and S&P including:
(i)proportionate liability of S&P and ABN Amro in terms of the councils’ claims against LGFS (see above);
(ii)liability of S&P and ABN Amro to LGFS for damages in respect of the Rembrandt 2006-3 CPDO notes that LGFS purchased and did not sell to councils but sold instead to its parent company, LGSS, after S&P downgraded the rating of those notes from AAA to BBB+; and
(iii)liability of S&P and ABN Amro to make equitable contribution to LGFS in respect of LGFS’s settlement of the StateCover claims against LGFS, S&P and ABN Amro relating to StateCover’s purchase of the Rembrandt 2006-2 CPDO notes.
(j)the claims of S&P and ABN Amro against LGFS for contributory negligence and being largely responsible for its own loss in respect of the Rembrandt 2006-3 CPDO notes that LGFS purchased and did not sell to councils, with the consequence that the damages payable to LGFS on that account must be reduced, should not be accepted;
(k)LGFS has proved that it suffered loss and damage as required to sustain its claims against S&P and ABN Amro in respect of the Rembrandt 2006-3 CPDO notes it did not sell to councils, the damage being the amount LGFS paid for the Rembrandt 2006-3 CPDO notes less the amount LGFS received on the sale to its parent company. Again, no deduction for coupon payments received by LGFS should be made;
(l)LGFS’s damages claims against S&P and ABN Amro attract the various proportionate liability provisions and liability for LGFS’s damages should be apportioned as between S&P and ABN Amro as to 50% each;
(m)the issue of interest referred to above applies equally to LGFS;
(n)LGFS’s claims against S&P and ABN Amro for damages or equitable contribution against S&P and ABN Amro in respect of LGFS’s settlement of the StateCover proceedings should be accepted, with LGFS, S&P and ABN Amro each to contribute 33⅓% to the overall settlement sum including LGFS’s costs of the proceedings;
(o)the cross-claims of S&P and ABN Amro against each other should be rejected;
(p)LGFS’s claims against AHAC for indemnity under the contract of insurance should be accepted and AHAC’s cross-claim against LGFS for reimbursement of defence costs already paid should be rejected; and
(q)costs, along with the outstanding issue of interest, may be argued.
Directions will be made for the parties to confer about a timetable for the making of any further submissions on interest and costs, as well as the making of final orders in accordance with these reasons for judgment.
I certify that the preceding three thousand seven hundred and twenty-three (3723) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Jagot. Associate:
Dated: 5 November 2012
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