Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) - [2012] FCA 1028

Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq)
[2012] FCA 1028
RARES J
summary
In accordance with the practice of the Federal Court in some cases of public interest, the following Summary has been prepared to accompany the reasons for judgment delivered today. The Summary is intended to assist understanding of the decision of the Court. It is not a complete statement of the conclusions reached by the Court or the reasons for those conclusions. The only authoritative statement of the Court’s reasons is that contained in the published reasons for judgment. The published reasons for judgment and this Summary will be available on the Internet at align="center">Wingecarribee Shire Council v Lehman Brothers Australia Ltd (In Liq)
[2012] FCA 1028
RARES J
SUMMARY
This is a representative proceeding, or class action, under Pt IVA of the Federal Court of Australia Act 1976 (Cth). The three applicants, Wingecarribee Shire Council, Parkes Shire Council and the City of Swan (which I will call the Councils) sought damages against the respondent, Lehman Bros Australia Ltd (In Liq), which was called Grange Securities Ltd (Grange) before it was acquired by Lehman Bros Holdings Inc in early March 2007. The three Councils claimed that they suffered losses arising out of their acquisition of synthetic collateralised debt obligations and some other complex financial products (collectively SCDOs). Most of the dealings between the parties occurred before Grange was taken over and I will simply refer to the respondent as “Grange”.
In representative proceedings, the Court can resolve issues of fact and law involving the representative applicants and the respondent that are common to claims that other group members also have against the same respondent. Here, members of the group claim to have suffered losses as a result of acquiring SCDOs in their dealings with Grange between 2003 and 2008. There were numerous common issues of fact and law resolved in these proceedings that also appear to be relevant to claims of other group members.
In general, SCDOs are highly complex financial products. Because of their nature, they have many risks, some of which justify the higher interest rates the products offered over similarly rated securities. Grange used the high ratings of the SCDOs as a significant selling point to its risk averse Council clients. In a very broad sense, which is oversimplified from what I have described in detail in my reasons, an SCDO is a sophisticated bet. A bank or financial institution puts together, or arranges, a product that offers investors a return at a marginal interest rate above the BBSW and which has a high credit rating. The SCDO will mature after a period, and if all goes well, the investors will receive their capital back. The product is issued by a specially incorporated company whose only business is to issue notes to investors and enter a credit default swap with the arranging bank. The swap works this way. The arranger identifies a portfolio of investment grade securities, usually being BBB or better rated, issued by corporations around the world. This is called a “reference portfolio”. Because it involves a number of companies’ loans or notes, the instrument is like a collateralised debt obligation. But, it is not necessary that the arranging bank have any loan or credit exposure to any of the corporations, or “reference entities”, in the reference portfolio. That is why these products are called “synthetic” – they involve a collection of reference entities that may or may not default on their debts owed to persons who may have no connection to the arranging bank, or the terms of the SCDO may provide that a ratings downgrade or some other event affecting one of the reference entities will be a default. All such circumstances are called “credit events”.
Next, the arranger and issuer of the SCDO select a range of the possible number of credit events that investors are asked to bet will not occur. Thus, typically an SCDO will provide that a tranche of, say, between the first 6% and 7% of the total reference portfolio will not suffer credit events, but if it does, then some or all of the investors’ capital will be lost. So, for example, 10 credit events in a reference portfolio of 150 reference entities will have to occur before the next credit event affects the tranche between 6% and 7% of the reference portfolio. If that next credit event occurs, then the credit default swap requires that the issuer of the SCDO pay a percentage or the whole of the investors’ capital to the swap counterparty, often the arranging bank. Once that occurs, that part or all of the investors’ investment is lost, and the issuer ceases to pay interest on it. So, even if reference entities suffer ratings downgrades, or default but later pay their debts, the synthetic nature of the SCDO, means that no actual loss needs to be suffered by the swap counterparty for the investors to lose some or all their capital.
Each of the three Councils had a different relationship with Grange. These were, in turn, said to be representative of the range of relationships various group members had with Grange. Each of the Councils had substantial surplus funds to invest, including rate revenue some of which would be needed to meet its expenses over the course of each financial or rating year. Before dealing with Grange, the Councils had invested conservatively, in bank products such as bank bills, term deposits and bank issued floating rate notes (FRNs). Those generally offered interest rates marginally better than the 90 day bank bill swap rate (BBSW). None of the Councils had officers with any significant experience in investment or financial products outside those limited classes of investments. Each Council was very concerned to ensure that none of its funds was invested in any products that had a substantive risk of loss of their ratepayers’ capital. Nonetheless, they wanted to ensure that their funds earnt the best returns available consistent with their conservative investment policies.
Grange put itself forward to Councils as a financial adviser that understood the investment requirements of local government, including relevant legislative and policy constraints. In late 2000, the New South Wales Minister for Local Government had made an order under the Local Government Act 1993 (NSW) that allowed councils to invest in any securities at all, however exotic, that had been rated “A1” or above by the ratings agencies. How that could have been considered appropriate for local government Councils when such ratings could be given to highly complex derivatives that had no relevance to local councils or their operations was not explained in any evidence.
At the times of Grange’s sales to the Councils, its SCDO products had credit ratings that were between AAA (the highest possible) and AA- (equivalent to the credit rating of the four major Australian banks). In general, Grange’s SCDOs offered interest rates in between about 0.75% and 1.50% above the BBSW. The extra interest, while usually better than that of products issued by Australian banks, was still relatively modest and was paid by a product with very high credit ratings.
Grange told the Councils when it dealt with them that its SCDO products were a form of floating rate notes. Grange told them that if the SCDOs were held to maturity the Councils would get their money back and that the products’ high credit ratings put them in the same “universe” of investments as debts of the AAA rated Australian Government and AA- rated four major Australian banks.
Grange also represented to the Councils that the investments, including SCDOs that it recommended or made on their behalves, were suitable for a conservative investment strategy. It represented that those products were prudent, capital protective investments and that they complied with statutory and Council policy requirements. Grange also represented to the Councils that those products were as liquid as the bank FRN products that the Councils were familiar with, could readily be redeemed for cash and were easily tradeable on an established secondary market. In addition, Grange represented to the Councils that the maturity dates for the SCDOs were suitable to the Councils’ needs.
Both Parkes and Swan began buying SCDOs from Grange in 2003. Over the next four years both Parkes and Swan bought from and sold back to Grange a considerable number of SCDOs. Those transactions always resulted in the Councils earning interest rates that were satisfactory and not suffering any losses of capital on any sales (leaving aside immaterial differences that were netted out with substantial profits from contemporaneous trades).
In late 2006, Wingecarribee called for expressions of interest for the provision of investment advisory services. That Council sought to improve the returns it was getting from its conservative investments predominantly in bank bills and short term deposits. In December 2006, Grange made a presentation to Wingecarribee during which the Council stated that it did not want to invest in CDOs. In early January 2007, Wingecarribee entered into a written individual managed portfolio (IMP) agreement with Grange. In February 2007, Swan also entered into an IMP agreement with Grange in respect of a large part of its investment portfolio. However, Swan also continued to hold substantial investments with other institutions.
The IMP agreements were drafted by Grange.   Under an IMP agreement, Grange could decide to invest in any products, subject to, first, the agreed investment guidelines and, secondly, to the Council’s right to require Grange to remove any investment it chose at “market price”. In this way the IMP agreement gave Grange control of the Council’s relevant investment portfolio. In Wingecarribee’s case this was worth over $50 million. The Wingecarribee IMP agreement contained investment guidelines that expressly permitted Grange to invest Wingecarribee’s funds in both CDOs and structured products. However, it also required any investment to be in a product for which there was an active secondary market and prohibited investment in derivates. In contrast, the Swan IMP agreement required that the Council have ready access to its funds for its day to day requirements without penalty.
After the global financial crisis began to develop in around mid 2007, many of the Councils’ SCDOs suffered credit events. Three have been wiped out (i.e. all money invested in them has been lost). In addition, 11 of the products issued by Lehman Bros Special Financing Inc and guaranteed by Lehman Bros Holdings Inc have been directly caught up in a conflict between judicial decisions in the United Kingdom and the United States that arose from the Chapter 11 bankruptcy of the US Lehman Bros companies. These notes were called the “Dante” notes. That problem has meant that the money now due to be repaid to investors in the affected products is frozen and unlikely to be returned for some years while the Courts work out whether some of the money that is available should be paid to the Lehman Bros companies, even though they have suffered no relevant loss, or returned to the investors as the Supreme Court of the United Kingdom decided last year.
The Councils (and other group members) claim to have suffered significant losses as a result of the 3 SCDOs that were wiped out, a number of others being redeemed after deduction of some losses and their need to hold other SCDOs, including the Dante notes, for long periods, which may or may not be repaid in full at some time in the future.
Each of the Councils alleged that Grange had breached the contracts they had made. Parkes and Swan both claimed that Grange had breached the individual contracts to purchase each SCDO because the product did not have the characteristics Grange had promised. Both Swan and Wingecarribee claimed that Grange had breached their IMP agreements by investing in the SCDOs when they were not appropriate investments for either Council. In addition, Wingecarribee claimed Grange breached its IMP agreement because the SCDOs had no active secondary market and were also derivatives.
The Councils also alleged that Grange had engaged in misleading and deceptive conduct contrary to what is now a plethora of pointlessly technical and befuddling statutory provisions scattered over many Acts in defined situations. The repealed, simple and comprehensive s 52 of the Trade Practices Act 1974 (Cth) that prohibited corporations engaging in misleading or deceptive conduct in trade or commerce has been done away with by a morass of dense, difficult to understand legislation. Those Acts, that now deal with misleading and deceptive conduct, apply differently depending on distinctions such as whether the alleged misleading conduct is in relation to “a financial product or a financial service” (s 1041H(1) of the Corporations Act 2001 (Cth)) or “financial services” (s 12DA(1) of the Australian Securities and Investments Commission Act 2001 (Cth)). Those apparently simple terms are nothing of the sort. A “financial product” is defined in mind-boggling detail in 7 pages of small type in Div 3 of Pt 7.1 of the Corporations Act while a “financial service” takes another 6 pages to be defined in Div 4 of Pt 7.1. The ASIC Act only takes about 4 pages to define “financial service” in s 12BAB. Obviously, there are differences in what each of these Acts and definitions cover – but why? The cost to the community, business, the parties and their lawyers, and the time for courts to work out which law applies have no rational or legal justification. The Parliament should consider returning to a simple clear two line long universal norm of conduct, as was contained in s 52, if it considers that misleading and deceptive conduct in trade or commerce ought be prohibited.
The Councils also claimed that, in each situation in which it acted for them, Grange was an investment adviser that owed them fiduciary duties.
Grange’s explanations to the Councils of the way in which the SCDOs worked emphasised that their high credit ratings reflected a very remote risk that the Councils’ capital could be lost, similar to the risk of loss from a loan to the Australian Government or the large local banks. However, that explanation was wrong. If general or systemic extreme market events occurred, such as a large market correction, a recession or as happened, the global financial crisis, the synthetic or structured nature of the SCDOs created a significantly greater risk of loss for investors than for similarly rated products, such as Australian government, a corporate or bank debt. That was because if a corporation or bank went into liquidation, a creditor, ordinarily, would not lose all its investment. Rather, the liquidator, ultimately, would pay a proportion of the amount owing. The SCDOs, on the other hand, were not investments in a corporation, but in a bundle of rights that were subject to all or nothing credit events.   The credit events did not need to cause any real world loss to anyone, yet could cause loss of some or all of the investors’ investment.
Prior to mid 2007, Grange had provided a secondary market that enabled its clients to buy and sell the SCDOs as a feature of its promotion of its sales of the SCDOs. Grange ensured that this market operated in such a way that, while economic conditions were stable, SCDOs could be sold quickly for at or above face value. But this market depended entirely on Grange being able either to on-sell a product to another client or to fund its repurchase itself. Grange made very large profits from selling new issues of SCDOs to its client base and from its trading with them in this secondary market. But the “market” was fragile. Grange was undercapitalised and, when economic conditions began to deteriorate, it could not operate the market any longer. The risk of this happening was set out by issuers of SCDOs in their offering documents. However, Grange did not tell its clients that there was no assurance that any secondary market would exist or continue to exist or that there would be any liquidity for the SCDOs. Nor did Grange tell its clients of the risk that the SCDOs would be effectively unsaleable if it did not continue to provide this “market”. If the worst happened, that would have the consequence that the Councils and group members would have to hold the SCDOs until they matured, sometimes several years later. Only once in about April 2007 did Grange provide information to its clients, and then in fine print, about the possibility of those risks in a slide presentation for the Lehman Bros SCDO known as Federation.
For those reasons, I have found that the SCDOs did not have the characteristics that Grange promised Parkes and Swan they would have in their individual contracts: that is, the SCDOs did not have a high level of security for the invested capital, were not easily tradeable on an established secondary market or able to be readily liquidated for cash and were not suitable investments for risk averse Councils. I have also found that Grange was negligent in recommending to and advising Parkes and Swan to make those investments. Similarly, I have found that by using its powers under the Wingecarribee and Swan IMP agreements to invest in SCDOs, Grange breached its obligations under those agreements. That was because it was negligent to use public money in investments with the risks that I have found the SCDOs had. In addition, Grange breached the Swan IMP agreement because the SCDOs did not provide that Council with ready access to funds, because of their lack of liquidity. It also breached the Wingecarribee IMP agreement because the SCDOs had no active secondary market and were derivatives.
For the same reasons, I have found that Grange engaged in misleading and deceptive conduct in breach of s 12DA of the ASIC Act when it promoted the SCDOs to the Councils as suitable investments.
I have also found that Grange acted in breach of its fiduciary duties as a financial adviser to each of Parkes and Swan, and in making investments as the agent of Swan and Wingecarribee under the IMP agreements. This was because Grange had a conflict between its duty to give sound financial advice to, or make investment decisions on behalf of, the Councils and its own interest in earning very large fees or profits in its sales of SCDOs that it did not disclose to any of the Councils. Grange would buy a new issue of an SCDO at between about 1.75% and 3% below face value before on-selling the issue to its clients at face value, thus making between about $1 and 2 million in profits or fees from each new issue for itself. In addition, because Grange controlled the secondary market, it set the purchase and sale prices and its profit margins in dealing with its clients at whatever level it chose. Grange also borrowed from its clients by what it called “no haircut repos” or repurchase agreements. These were short term loans on the security of SCDOs at BBSW + 0.1% (less than the interest rate on a bank issued FRN). It also used its powers under the IMP agreements to borrow from its clients using these “repos”. The inappropriateness of such a transaction was explained in an internal email written in late 2006 by Moray Vincent, Grange’s director debt capital markets. Mr Vincent wrote about the problems that Grange was then suffering from having to fund the promises it had made to its clients that it would provide a secondary market and liquidity, saying:
“The situation is analogous to our no haircut repos with Councils. In reality although these guys have no haircut, they have the defence that if we don’t buy the stock back from them that we knowingly took advantage of them and they would have a case against our deep-pocketed Directors. If we did repos with haircuts, this case of being uninformed would be severely weakened as the haircut is defacto an acknowledgement of the risk of price movement and counterparty being caught short with Grange going bust and the stock post haircut being worth less than their investment. However obviously the informed institution makes the haricut [sic] so large that is [sic] covers their “mpl” [scil: maximum potential loss] scenario that makes funding stock with informed investors prohibitive for us.”   (emphasis added)

This showed that not only were the SCDOs risky, illiquid, and, if sold, might realise far less than their face value, but also that Grange was conscious that the trust its uninformed Council clients had placed in it was being used to Grange’s advantage.
For those reasons, Grange is liable to compensate the Councils for their losses incurred as a result of their investments. I have concluded that damages should be assessed on the basis that the Councils are entitled to:
(1)the amount lost in investments in SCDOs that have either been wiped out or paid less than 100 cents in the dollar on maturity or which the Councils sold at a loss in an effort to avert further loss (being $3 million for Swan, over $4.1 million for Parkes and $8.80 million for Wingecarribee);
(2)the difference between the par values and the values that I have assessed of unmatured SCDOs;
(3)in respect of the Dante notes, net present values essentially based on averaging the two possible outcomes of the current conflicting UK and US court decisions and the substantial delay that is likely before any sum is repaid to the investors.

The parties will need to calculate the amount of each Council’s loss in the second and third categories of damages on the basis of the values I have found for each relevant product.
There are many issues that the parties will need to consider in order to assist the Court to make final orders that are appropriate. Because Grange is in liquidation it cannot be ordered to make any payments at this time. Rather, as all the parties requested at the hearing, they will need to work through the reasons (over 440 pages long) to identify what orders should be made and any matters that I have overlooked or that require attention so that all outstanding issues can be resolved. These will include those findings that are relevant to resolve issues in
the class action generally.
FEDERAL COURT OF AUSTRALIA
Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq)
[2012] FCA 1028

Citation: Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) [2012] FCA 1028

Parties: WINGECARRIBEE SHIRE COUNCIL, CITY OF SWAN and PARKES SHIRE COUNCIL v LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) (ACN 066 797 760)

File number: NSD 2492 of 2007

Judge: RARES J

Date of judgment: 21 September 2012

Corrigendum: 1 October 2013
22 November 2012

Catchwords:
CONTRACT – implication of terms – construction of written and oral contracts for purchase or sale of complex financial products – construction of written contract authorising respondent to undertake transactions on applicants’ behalf

NEGLIGENCE – implied contractual term and co-extensive tortious duty of financial adviser to exercise reasonable skill and care in making recommendations giving advice to, or acting on behalf of client in making investments – whether obligation or duty affected by written disclaimers – whether disclaimer sufficient to exclude liability for negligence in oral statements recommending or advising a course of action – where disclaimer purports to exclude liability and assumption of responsibility for financial advice and urges reader to seek advice from its own financial adviser – where author of disclaimer is client’s financial adviser – whether client affected or bound by disclaimer – whether applicants were contributorily negligent

TRADE PRACTICES – misleading and deceptive conduct – whether respondent engaged in conduct that was misleading or deceptive contrary to s 12DA(1) of the Australian Investments and Securities Commission 2001 (Cth) – where pleaded representations made orally and in written material – where disclaimers appearing in small print on written materials qualified or contradicted oral assertions – where written disclaimers were not repeated orally or otherwise drawn to the applicants’ attention – whether person relying on representation failed to take reasonable care for purposes of s 12GF(1) of the Australian Securities and Investments Commission Act 2001 (Cth)

EQUITY – fiduciary obligations – relationship between financial adviser and client – whether respondent owed fiduciary obligations to applicants in recommending or effecting transactions or giving financial advice – where respondent earned large profits from its sale of financial products to its clients including applicants – where such fees not disclosed – whether contractual term entitling client to request disclosure of any fees sufficient to relieve fiduciary of need to obtain fully informed consent – whether disclosure to client of possibility that respondent may earn fees sufficient to relieve fiduciary of need to obtain fully informed consent – whether respondent obliged (a) not to obtain an unauthorised benefit from the fiduciary relationship, and (b) not to be in position of conflict between the fiduciary’s interests and duties and interests of the applicants – whether respondent breached duty in failing to warn applicants about the risks associated with investments it recommended to or made on behalf of the applicants

VALUATION –principles applicable to valuation of securities – whether, where no actual or sufficient market transactions, judicial valuer can rely on bids as evidence of value of illiquid securities

DAMAGES – whether ‘left in hand’ test or difference between price and true value appropriate measure of damages in contract, tort or under s12GF(1) of the Australian Securities and Investments Commission Act 2001 (Cth) – where applicants induced to buy securities – where securities did not have properties warranted in contract – where recommendation or advice to buy securities given negligently – where recommendation or advice to buy securities misleading or deceptive

PRACTICE AND PROCEDURE – group proceedings brought pursuant to Pt IVA of the Federal Court of Australia Act 1976 (Cth) – whether common questions of fact or law determined in representative proceeding

Legislation: Australian Securities and Investments Commission Act 2001 (Cth) s 12GF, 12GP, 12GR
Civil Liability Act 2002 (NSW) ss 5B, 5C, 5D, 5E, 5O, 5R, 5S
Civil Liability Act 2002 (WA) ss 5B, 5C, 5D, 5K
Competition and Consumer Act 2010 (Cth) Sch 2, s 18
Corporations Act 2011 (Cth) Pt VB, ss 9, 554(1), 708(8), 761D, 764A, 769B, 912A, 991E, 1041H(1)
Corporations Regulations 2001 (Cth) reg 7.8.20(1A)
Federal Court of Australia Act 1976 (Cth) Pt IVA
Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Act 1947 (WA) ss 3A, 4(1)
Law Reform (Miscellaneous Provisions) Act 1965 (NSW) ss 8, 9
Local Government Act 1993 (NSW) s 625
Local Government Act 1995 (WA) s 6.14
Trade Practices Act 1974 (Cth) s 52(1)
Trustee Act 1925 (NSW) ss 14A, 14C
Trustees Act 1962 (WA) Pt III, ss 18(1)(a)
Bankrupty Code (USA) Ch 11

Cases cited:
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ACQ Pty Ltd v Cook (2008) 72 NSWLR 318 doubted
Adeels Palace Pty Ltd v Moubarak (2009) 239 CLR 420 applied
Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588 applied
Astley v Austrust Ltd (1999) 197 CLR 1 applied
Austin v Austin (1906) 3 CLR 516 applied
Australian Iron & Steel Ltd v Greenwood (1962) 107 CLR 308 referred to
Australian Securities and Investments Commission v Hellicar (2012) 286 ALR 501 applied
Australian Softwood Forests Pty Ltd v Attorney General (NSW) Ex Rel Corporate Affairs Commission (1981) 148 CLR 121 considered
Banque Commerciale SA (in Liq) v Akhil Holdings Ltd (1990) 169 CLR 279 applied
Beneficial Finance Corp Ltd v Karavas (1991) 23 NSWLR 256 applied
Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 applied
Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1 referred to

Blair v Curran (1939) 62 CLR 464 applied

Bonnington Castings Ltd v Wardlaw [1956] AC 613 referred to
BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 applied
British Westinghouse Electric and Manufacturing Company of London Ltd v Underground Electric Railways Company of London Ltd [1912] AC 673 applied
Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 applied
Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 applied
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Chappell v Hart (1998) 195 CLR 23 referred to
Commissioner of Taxation v Firth (2002) 120 FCR 450 applied
Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300 applied
Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84 applied
Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 applied
Construction, Forestry, Mining and Energy Union v Australian Building and Construction Commission [2012] FCAFC 44 applied
Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd [2004] FCAFC 48 considered
Cornish v Midland Bank Ltd [1985] 3 All ER 513 applied
Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 applied
Daniels v Anderson (1995) 37 NSWLR 428 applied
Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd (2007) 164 FCR 450 referred to
Dobler v Halverson (2007) 70 NSWLR 151 applied
Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 applied
Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 applied
Ferneyhough v Westpac Banking Corp [1991] FCA 709 applied
Fouche v Superannuation Fund Board (1952) 88 CLR 609 applied
Furs Ltd v Tomkies (1936) 54 CLR 583 applied
Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 applied
Gluckstein v Barnes [1900] AC 240 referred to
Goold v Commonwealth (1993) 42 FCR 51 applied
Gould v Vaggelas (1985) 157 CLR 215 applied
Government Employees Superannuation Board v Martin (1997) 19 WAR 224 applied
Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1 applied
Gull v Saunders & Stuart (1913) 17 CLR 82 applied
Hadley v Baxendale (1854) 9 Exch 341 referred to
Hawkins v Bank of China (1992) 26 NSWLR 562 applied
Henderson v Amadio (1995) 62 FCR 1 applied
Henville v Walker (2001) 206 CLR 459 referred to
Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 applied
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd 217 CLR 640 applied
IFE Fund SA v Goldman Sachs International [2007] 2 CLC 134 distinguished
In re Coomber; Coomber v Coomber [1911] 1 Ch 723 applied
In re Lehman Bros Holdings Inc 422 BR 407 (2010) referred to
In re Whiteley (1886) 33 Ch D 347 referred to
John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1 applied
Jones v Dunkel (1959) 101 CLR 298 applied
Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 applied
Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281 applied
Kocsardi v Elegant Tiles Pty Ltd [1996] FCA 1014 referred to
Maguire v Makaronis (1997) 188 CLR 449 applied
Mathew v Blackmore (1857) 1 H&N 762 applied
McCullagh v Lane Fox & Partners Ltd [1996] 10 PNLR 205 distinguished
McDonald v Deputy Federal Commissioner of Land Tax (NSW) (1915) 20 CLR 231 applied
McKenzie v McDonald [1927] VLR 134 applied
Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357 applied
Mills v Stanway Coaches Ltd [1940] 2 KB 334 referred to
MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167 applied
Monaghan Surveyors Pty Ltd v Stratford Glen-Avon Pty Ltd [2012] NSWCA 94 referred to
Nocton v Lord Ashburton [1914] AC 932 applied
Nominal Defendant v Meakes (2012) 60 MVR 380 referred to
Norman v National Australia Bank Ltd (2009) 180 FCR 243 applied
North East Equity Pty Ltd v Proud Nominees Pty Ltd (2012) 285 ALR 217 applied
Parker, In the matter of Purcom No 34 Pty Ltd (In Liq) (No 2) [2010] FCA 624 applied
Perpetual Trustee Co Ltd v BNY Corporate Services Ltd [2012] 1 AC 383 considered
Perpetual Trustee Co Ltd v BNY Corporate Trustee Services Ltd [2010] 2 BCLC 237 referred to
Perpetual Trustee Co Ltd v Milanex Pty Ltd (In Liq) [2011] NSWCA 367 referred to
Phillips v Brewin Dolphin Bell Lawrie Ltd [2001] 1 WLR 143 referred to
Pilmer v Duke Group Ltd (In liq) (2001) 207 CLR 165 applied
Podrebersek v Australian Iron & Steel Pty Ltd (1985) 59 ALR 529 applied
Potts v Miller (1940) 64 CLR 282 considered
Potts v Westpac Banking Corporation [1993] 1 Qd R 135 considered
Re Opus Prime Stockbroking Ltd (2008) 171 FCR 473 applied
Roads and Traffic Authority (NSW) v Refrigerated Roadways Pty Ltd (2009) 77 NSWLR 360 referred to
Robinson v Harman (1848) 1 Exch 850 applied
Rogers v Whitaker (1992) 175 CLR 479 referred to
Shrimp v Landmark Operations Pty Ltd (2007) 163 FCR 510 referred to
Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 applied
Smith v Zhang (2012) 60 MVR 525 referred to
St George Bank Ltd v Quinerts (2009) 25 VR 666 referred to
Strong v Woolworths Ltd (t/a Big W) (2012) 285 ALR 420 applied
Sydney South West Area Health Service v MD (2009) 260 ALR 702 applied
Tate v Williamson (1866) LR 2 Ch App 55 applied
Tepko Pty Ltd v Water Board (2001) 206 CLR 1 applied
The King v New Queensland Copper Co Ltd (1917) 23 CLR 495 applied
The “Putbus” [1969] P 136 referred to
Thornton v Shoe Lane Parking Ltd [1970] 2 QB 163 referred to
Trompp v Liddle (1941) 41 SR (NSW) 108 applied
Trustees of the Property of Cummins (A Bankrupt) v Cummins (2006) 227 CLR 278 applied
Twycross v Grant (1877) 2 CPD 469 applied
Vale v Sutherland (2009) 237 CLR 638 applied
Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority (2008) 233 CLR 259 applied
Warman International Ltd v Dwyer (1995) 182 CLR 544 referred to
Watson v Foxman (1995) 49 NSWLR 315 applied
Wong v Silkfield Pty Ltd (1999) 199 CLR 255 applied
Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 applied
Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 applied

References:

JD Heydon and MJ Leeming: Jacobs’ Law of Trusts (7^th ed), LexisNexis Butterworths Australia, 2006

PA Keane: The 2009 WA Lee Lecture in Equity: The Conscience of Equity (2009) 84 ALJ 92

Dates of hearing: 2-3, 7-10, 14-18, 21, 24-25, 28-31 March 2011;
30-31 May 2011; 1-3, 6-7 June 2011; 1 December 2011;
3 February 2012; 20 August 2012

Date of last submissions: 10 September 2012

Place: Sydney

Division: GENERAL DIVISION

Category: Catchwords

Number of paragraphs: 1247

Counsel for the Applicants:
Mr AJ Meagher SC with Mr L Armstrong and Mr D Sulan
(2 March 2011-7 June 2011)

Mr N Hutley SC with Mr D Sulan
(1 December 2011 and 3 February 2012)

Mr D Sulan (20 August 2012)

Solicitor for the Applicants: Piper Alderman

Counsel for the Respondent: Mr J Sheahan SC with Mr S Nixon, Mr J Hutton and
Mr S Fitzpatrick

Solicitor for the Respondent: Ashurst Australia

FEDERAL COURT OF AUSTRALIA
Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq)
[2012] FCA 1028

CORRIGENDUM
1.In paragraph [118] delete Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2012] 1 AC 383 at 429 [383] and substitute Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2012] 1 AC 383 at 429 [138].
2.In paragraphs [829], [839], [1056], [1071], [1197] delete Perpetual Trustee Co Ltd v BNY Corporate Services Limited and substitute Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd.
3.In the cases cited section of the cover sheet delete Perpetual Trustee Co Ltd v BNY Corporate Services Limited [2012] 1 AC 383 considered and substitute Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2012] 1 AC 383 considered.

I certify that the preceding three (3) numbered paragraphs are a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Rares.
Associate:
Dated: 1 October 2013
FEDERAL COURT OF AUSTRALIA
Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq)
[2012] FCA 1028

CORRIGENDUM
1. In [1049]:
(a)delete “the day before on 21 March 2011” and substitute “on 21 January 2011”;
(b)delete “34%” and substitute “31%”.

2.In [1052] delete “34%” and substitute “31%” in the Valuation column for “Newport”.

I certify that the preceding two (2) numbered paragraphs are a true copy of the Corrigendum to the Reasons for Judgment herein of the Honourable Justice Rares.
Associate:
Dated: 22 November 2012

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 2492 of 2007

BETWEEN:
WINGECARRIBEE SHIRE COUNCIL
First Applicant

CITY OF SWAN
Second Applicant

PARKES SHIRE COUNCIL
Third Applicant

AND:
LEHMAN BROTHERS AUSTRALIA LIMITED
(IN LIQUIDATION) (ACN 066 797 760)
Respondent

JUDGE:

RARES J

DATE OF ORDER:

21 September 2012

WHERE MADE:

SYDNEY

THE COURT ORDERS THAT:
1.The parties:
(a)prepare and exchange:
(1)on or before 8 October 2012 short minutes of orders to give effect to the reasons for judgment delivered on 21 September 2012;
(2)on or before 12 October 2012 submissions as to matters on which they cannot agree on the form of orders or to correct any omission or error in those reasons;
(3)on or before 19 October 2012 submissions in reply;

(b)on or before 19 October 2012 provide a copy of such short minutes and submissions to the associate to Rares J.

2.The proceedings stand over to 5 November 2012 for the purpose of making orders to give effect to these reasons.
Note:Entry of orders is dealt with in Rule 30.32 of the Federal Court Rules 2011.

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY

GENERAL DIVISION

NSD 2492 of 2007

BETWEEN:
WINGECARRIBEE SHIRE COUNCIL
First Applicant

CITY OF SWAN
Second Applicant

PARKES SHIRE COUNCIL
Third Applicant

AND:
LEHMAN BROTHERS AUSTRALIA LIMITED
(IN LIQUIDATION) (ACN 066 797 760)
Respondent

JUDGE:

RARES J

DATE:

21 september 2012

PLACE:

SYDNEY

REASONS FOR JUDGMENT

1........ . Introduction........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [1]

2........ . The Councils’ claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [10]

3........ . SCDOS - General........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [29]

3.1...... Grange’s expert credentials........ ........ ........ ........ ........ ........ ........ ........ .... [30]

3.2...... A brief overview of SCDOs traded by Grange in 2002-2007........ ....... [34]

3.3...... The nature of the Claim SCDOs........ ........ ........ ........ ........ ........ ........ .... [39]

3.4...... The types of Claim SCDOs........ ........ ........ ........ ........ ........ ........ ........ .... [52]

3.5...... Relevant risks of the Claim SCDOs........ ........ ........ ........ ........ ........ ....... [62]

3.5.1... Market implied risks........ ........ ........ ........ ........ ........ ........ ........ ... [65]

3.5.2... The risk in respect of the amount of any loss........ ........ ........ ..... [80]

3.5.3... The risk of market price volatility........ ........ ........ ........ ........ ...... [85]

3.5.4... Liquidity risks........ ........ ........ ........ ........ ........ ........ ........ ........ .... [103]

3.6...... The risks identified by the arrangers or issuers........ ........ ........ ........ ..... [114]

3.7...... Risks identified in other contemporaneous documents........ ........ ........ . [126]

4........ . Grange’s relationships with Swan, Parkes and Wingecarribee........ ........ .. [142]

4.1.1... Grange, its competitors and local government councils........ .... [146]

4.1.2... Grange’s personnel........ ........ ........ ........ ........ ........ ........ ........ ..... [148]

4.1.3... Grange’s business........ ........ ........ ........ ........ ........ ........ ........ ....... [154]

4.2...... The initial relationship between Swan and Grange........ ........ ........ ....... [155]

4.2.1... Swan’s personnel and its investment policy before 2003........ .. [155]

4.2.2... Swan’s contact with Grange before the 2003 Swan Policy....... [167]

4.2.3... The 2003 Swan Policy........ ........ ........ ........ ........ ........ ........ ....... [175]

4.2.4... Swan’s first investment with Grange – the Forum AAA SCDO [178]

4.2.5... Swan’s next investment: Argyle AAA SCDO........ ........ ........ .. [209]

4.2.6... Grange’s appreciation of Swan’s lack of financial sophistication........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [218]

4.2.7... Grange’s pattern of dealing with Swan from late 2003........ ..... [229]

4.2.8... Swan’s dealings in 2005 with SCDOs........ ........ ........ ........ ....... [244]

4.2.9... Grange’s “no haircut repos”........ ........ ........ ........ ........ ........ ....... [264]

4.2.10. Grange’s next dealings with Swan........ ........ ........ ........ ........ ..... [269]

4.2.11. Mr Senathirajah is succeeded by Mr Downing........ ........ ........ .. [274]

4.2.12. Mr Downing’s first transaction with Grange........ ........ ........ ..... [285]

4.2.13. Grange’s 6 June 2006 IMP proposal for Swan........ ........ ........ .. [292]

4.2.14. Why was Grange proposing switches?........ ........ ........ ........ ....... [293]

4.2.15. Swan’s transactions in 2006 after June........ ........ ........ ........ ...... [308]

4.3...... 2007: Swan enters into an IMP agreement with Grange........ ........ ...... [355]

4.3.1... The Swan IMP agreement........ ........ ........ ........ ........ ........ ........ .. [357]

4.3.2... Grange’s dealings under the Swan IMP agreement........ ........ ... [363]

4.3.3... Mr Cameron succeeds Mr Downing in May 2007........ ........ ..... [377]

4.3.4... Events after 2007 involving Swan........ ........ ........ ........ ........ ..... [394]

4.3.5... Other factors going to causation of Swan’s investment decisions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [396]

4.3.6... Causation........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [406]

4.4...... The relationship between Parkes and Grange........ ........ ........ ........ ........ [411]

4.4.1... Parkes’ personnel and investment policy before 2002........ ....... [411]

4.4.2... Parkes’ initial dealings with Grange........ ........ ........ ........ ........ .. [430]

4.4.3... Parkes’ first SCDO investment with Grange – the Forum AAA SCDO........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [439]

4.4.4... Parkes’ later dealings with Grange in 2003........ ........ ........ ....... [463]

4.4.5... Parkes’ HY-FI transaction........ ........ ........ ........ ........ ........ ........ .. [481]

4.4.6... Parkes’ later dealings in 2003........ ........ ........ ........ ........ ........ .... [496]

4.4.7... Parkes’ dealings in 2004-2005........ ........ ........ ........ ........ ........ ... [501]

4.4.8... Parkes begins developing an investment policy........ ........ ........ . [553]

4.4.9... Parkes dealings with Grange in 2006-2007........ ........ ........ ....... [565]

4.4.10. Parkes’ 2008 Esperance Combo Notes purchase........ ........ ....... [601]

4.5...... The relationship between Wingecarribee and Grange........ ........ ........ ... [607]

4.5.1... Wingecarribee’s personnel and its investment policy in 2006... [607]

4.5.2... Wingecarribee seeks to appoint an investment adviser........ ...... [614]

4.5.3... Wingecarribee enters into the Wingecarribee IMP agreement with Grange........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [637]

4.5.4... Wingecarribee’s and Grange’s early dealings under the IMP agreement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [645]

4.5.5... The repos of 12 February 2007 and the meeting of 16 February 2007........ ........ ........ ........ ........ ........ ........ ........ ........ .... [653]

4.5.6... Wingecarribee’s finance committee meeting of 21 February 2007........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [679]

4.5.7... Wingecarribee’s dealings with Grange to mid July 2007........ .. [689]

4.5.8... Wingecarribee’s decision to sell the Federation Claim SCDO.. [695]

5........ . The legal character of the relationships between the Councils and Grange........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [719]

5.1...... The relationships between Swan and Grange........ ........ ........ ........ ........ [721]

5.1.1... The pre-IMP agreement contractual relationship between Swan and Grange........ ........ ........ ........ ........ ........ ........ ........ ....... [721]

5.1.2... Did Grange owe fiduciary obligations to Swan before 9 February 2007?........ ........ ........ ........ ........ ........ ........ ........ ........ ... [732]

5.1.3... What representations were made to Swan?........ ........ ........ ........ [750]

5.1.4... Terms and representations not made out........ ........ ........ ........ .... [760]

5.1.5... The Swan IMP relationship........ ........ ........ ........ ........ ........ ........ [768]

5.1.6... What was Grange’s duty of care to Swan?........ ........ ........ ........ [784]

5.2...... The legal consequences of the relationship between Parkes and Grange........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [791]

5.2.1... The contractual relationship between Parkes and Grange........ . [791]

5.2.2... Did Grange owe fiduciary obligations to Parkes?........ ........ ...... [795]

5.2.3... What representations were made to Parkes?........ ........ ........ ...... [796]

5.2.4... What was Grange’s duty of care to Parkes?........ ........ ........ ....... [807]

5.3...... The legal consequences of the relationship between Wingecarribee and Grange........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ..... [808]

5.3.1... The Wingecarribee IMP relationship........ ........ ........ ........ ........ . [809]

5.3.2... What representations were made to Wingecarribee?........ ........ . [814]

5.3.3... What was Grange’s duty of care to Wingecarribee?........ ........ .. [819]

6........ . Did Grange breach any obligation, duty or statute?........ ........ ........ ........ .... [820]

6.1...... The Dante notes problem........ ........ ........ ........ ........ ........ ........ ........ ....... [822]

6.1.1... The Dante notes in general........ ........ ........ ........ ........ ........ ........ . [823]

6.1.2... The relevant terms of the Dante notes........ ........ ........ ........ ........ [825]

6.1.3... The English and United States judgments........ ........ ........ ........ . [829]

6.1.4... Other developments relating to the Dante notes........ ........ ........ [833]

6.1.5... The position in respect of the collateral for the Dante Notes..... [838]

6.2...... Contractual breaches........ ........ ........ ........ ........ ........ ........ ........ ........ ...... [842]

6.2.1... The pre-Swan IMP agreement and Parkes contractual breaches by Grange........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [843]

6.2.2... Did the product have a high level of security for protection of the capital invested by the Council?........ ........ ........ ........ ........ ... [845]

6.2.3... Were the Claim SCDOs easily tradeable on an established secondary market?........ ........ ........ ........ ........ ........ ........ ........ ...... [864]

6.2.4... Were the Claim SCDOs readily able to be liquidated for cash at short notice?........ ........ ........ ........ ........ ........ ........ ........ ........ ... [883]

6.2.5... Were the products suitable and appropriate for a risk averse local government council?........ ........ ........ ........ ........ ........ ........ . [887]

6.2.6... Did the Claim SCDOs have secure income streams?........ ........ [896]

6.2.7... Did Grange exercise reasonable skill and care in making each investment recommendation and giving that investment advice to Swan (before the IMP agreement) and Parkes?........ ........ ..... [899]

6.2.8... Did Grange breach the Swan IMP agreement?........ ........ ........ .. [904]

6.2.9... Did Grange breach the Wingecarribee IMP agreement?........ ... [920]

6.2.10. Conclusions on contractual issues........ ........ ........ ........ ........ ...... [931]

6.3...... Was there a breach of fiduciary obligation by Grange?........ ........ ........ [932]

6.3.1... Did Grange commit a breach of its fiduciary obligations owed to Swan before 9 February 2007?........ ........ ........ ........ ........ ...... [932]

6.3.2... Did Grange commit a breach of its fiduciary duty owed to Parkes?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [942]

6.3.3... Did Grange commit a breach of its fiduciary duty owed to each of Swan and Wingecarribee in respect of their IMP agreements?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [943]

6.4...... Were the representations made by Grange misleading or deceptive?... [947]

6.4.1... The legislative context........ ........ ........ ........ ........ ........ ........ ....... [947]

6.4.2... Were representations (1)(a) and (2) misleading or deceptive?.. [955]

6.4.3... Were representations (1)(b) and (3)(g) misleading or deceptive?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [961]

6.4.4... Were representations (3)(a), (b) and (c) misleading or deceptive?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [969]

6.4.5... Were representations (3)(d), (e), (f) and (4) misleading or deceptive?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [977]

6.5...... Did Grange breach its duty of care?........ ........ ........ ........ ........ ........ ...... [979]

6.6...... Grange’s claim for indemnity under the IMP agreements........ ........ ..... [980]

7........ . Damages........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [982]

7.1...... The issues as to value of the Councils’ existing holdings of the Claim SCDOs........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [982]

7.1.1... The appropriate measure of damages - principles........ ........ ...... [984]

7.1.2... How the damages should be assessed........ ........ ........ ........ ........ [996]

7.2...... Valuations of the Claim SCDOs........ ........ ........ ........ ........ ........ ........ .... [1007]

7.2.1... Swan’s and Parkes’ sales of the Kalgoorlie, Esperance and Blaxland Claim SCDOs........ ........ ........ ........ ........ ........ ........ ..... [1007]

7.2.2... The issues between the valuers........ ........ ........ ........ ........ ........ .. [1014]

7.2.3... The use of bids in valuation........ ........ ........ ........ ........ ........ ....... [1019]

7.2.4... The valuation of the remaining non Dante notes........ ........ ....... [1026]

7.2.5... The valuation of the Dante notes........ ........ ........ ........ ........ ....... [1053]

7.3...... Other issues on valuation........ ........ ........ ........ ........ ........ ........ ........ ....... [1074]

7.3.1... The restructure SCDOs non-issue........ ........ ........ ........ ........ ...... [1074]

7.3.2... The valuation issue in Grange’s liquidation........ ........ ........ ....... [1075]

8........ . Grange’s defences........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [1078]

8.1...... The issues Grange raised as defences........ ........ ........ ........ ........ ........ .... [1078]

8.1.1... Proportionate liability – principles........ ........ ........ ........ ........ ..... [1082]

8.2...... Concurrent wrongdoers........ ........ ........ ........ ........ ........ ........ ........ ........ .. [1085]

8.2.1... Grange’s claims that the ratings agencies were concurrent wrongdoers........ ........ ........ ........ ........ ........ ........ ........ ........ ........ . [1085]

8.2.2... Were the ratings agencies concurrent wrongdoers?........ ........ ... [1091]

8.2.3... Grange’s claim that Lehman Asia was a concurrent wrongdoer [1103]

8.2.4... Did Grange act in accordance with peer professional opinion?. [1108]

8.3...... Contributory negligence........ ........ ........ ........ ........ ........ ........ ........ ........ . [1118]

8.3.1... The legislative schemes........ ........ ........ ........ ........ ........ ........ ...... [1118]

8.3.2... Principles applicable to contributory negligence........ ........ ....... [1123]

8.3.3... Was Swan contributorily negligent?........ ........ ........ ........ ........ .. [1132]

8.3.4... Was Parkes contributorily negligent?........ ........ ........ ........ ........ [1143]

8.3.5... Was Wingecarribee contributorily negligent?........ ........ ........ ... [1172]

9........ . Are the typical Claim SCDOs “derivatives” within the Corporations Act 2001........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [1176]

9.1...... The “derivatives” issue........ ........ ........ ........ ........ ........ ........ ........ ........ .. [1176]

9.1.1... The general nature of the issue........ ........ ........ ........ ........ ........ ... [1176]

9.1.2... The legislative scheme........ ........ ........ ........ ........ ........ ........ ....... [1177]

9.1.3... The relevant features of the transaction documentation for the Blaxland Claim SCDO........ ........ ........ ........ ........ ........ ........ ....... [1180]

9.2...... The parties’ submissions........ ........ ........ ........ ........ ........ ........ ........ ........ [1186]

9.2.1... The parties’ arguments – debentures........ ........ ........ ........ ........ .. [1186]

9.2.2... The parties’ arguments – managed investment scheme........ ..... [1189]

9.3...... Consideration – Were the typical Claim SCDOs derivatives contracts?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....... [1194]

9.3.1... Consideration – Were the typical Claim SCDOs debentures?... [1194]

9.3.2... Consideration – Were the typical Claim SCDOs a managed investment scheme?........ ........ ........ ........ ........ ........ ........ ........ ... [1206]

9.3.3... Consideration – derivatives........ ........ ........ ........ ........ ........ ........ [1214]

10....... Common questions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ... [1215]

10.1.... The common questions identified?........ ........ ........ ........ ........ ........ ........ [1215]

10.1.1. The role of common questions........ ........ ........ ........ ........ ........ ... [1215]

10.1.2. The common questions posed by the Councils........ ........ ........ .. [1219]

10.2.... Common questions – consideration........ ........ ........ ........ ........ ........ ....... [1221]

10.2.1. Question (1): The features of the Claim SCDOs........ ........ ...... [1221]

10.2.2. Question (2): Were the Claim SCDOs consistent with conservative investment strategies or investment requirements in legislation affecting local government bodies or trustees?.... [1224]

10.2.3. Question (3): What was Grange’s obligation or duty to exercise reasonable skill and care and did it breach that obligation or duty?........ ........ ........ ........ ........ ........ ........ ........ ..... [1226]

10.2.4. Question (4): Did Grange engage in conduct that was misleading or deceptive?........ ........ ........ ........ ........ ........ ........ .... [1232]

10.2.5. Question (5): What contracts were made between Grange and its non IMP claimants, what, if any, fiduciary obligations did Grange owe and what, if any, breaches were there of either?.... [1235]

10.2.6. Question (6): What rights did the Western Australian IMP agreement claimants have?........ ........ ........ ........ ........ ........ ........ [1241]

10.2.7. Question (7): What rights did the New South Wales IMP agreement claimants have?........ ........ ........ ........ ........ ........ ........ [1242]

10.2.8. Question (8): What are the correct principles for measuring damages?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .... [1244]

11....... Conclusion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ [1245]

1. Introduction

The three applicants, Wingecarribee Shire Council (Wingecarribee), Parkes Shire Council (Parkes) and City of Swan (Swan) are local government bodies (the Councils). Each had dealings with the respondent, Grange Securities Limited, as it was called, before being acquired by the Lehman Bros group in early 2007 and being renamed Lehman Bros Australia Ltd (I will usually refer to the respondent as “Grange” since most of the dealings occurred when it was so named). These are representative proceedings or a “class action” brought under Pt IVA of the Federal Court of Australia Act 1976 (Cth). The applicants claim that the different manners in which each dealt with Grange reflect aspects of the relationships that other group members (claimants) had with it on which the group claims are based. In these reasons for ease of reading, I will describe the claims made by each Council without referring separately to the fact that it is also a claim made generically for the claimants. I will return to the group issues in section 10 below.
Each Council had surplus funds to invest. Each sought a secure investment with a reasonable return. Before they commenced dealing with Grange, each Council had invested surplus funds in floating rate notes (FRNs) with approved deposit taking institutions (ADIs), such as Australian banks and building societies that were regulated by the Australian Prudential Regulation Authority (APRA).
In about early 2003, Grange began recommending a new type of financial instrument to persons with whom it sought to deal. This product was known as a synthetic collateralised debt obligation or SCDO. SCDOs were extremely complex. They took hundreds of close typed legally dense pages to document, and it was no easier to understand how they operated. Each SCDO was a bespoke product, though they shared some common features. Grange was the vendor of each SCDO it sold to the Councils.
Each Council claimed that Grange was an investment adviser to it. Grange, in contrast, asserted that in most cases it was a financial product vendor, much like an equipment supplier, or a salesperson. Both Swan and Parkes began dealing with Grange in around late 2002 and this relationship continued until late in 2007 or early 2008. These dealings involved Grange proposing investments to each of those Councils in SCDOs. Grange usually made presentations of the particular SCDO orally and in writing to the Council’s responsible officer. Those presentations explained some features of the proposed investment, but both Swan and Parkes assert that the explanations were deficient.
In January 2007, Wingecarribee entered into an individual managed portfolio (IMP) agreement with Grange. This allowed Grange to invest the Council’s funds in financial products with credit ratings of AA and above of a kind approved by the New South Wales Minister for Local Government, including SCDOs as well as FRNs issued by ADIs. Later, in February 2007, Swan also entered into an IMP with Grange.
Grange used its position under the IMP agreements to cause each of Wingecarribee and Swan to purchase a number of SCDOs as part of their portfolios. By mid 2007 the seeds of what has become known as the “global financial crisis” had begun to germinate. Until then, Grange had made a secondary market for the SCDOs it had placed with the Councils, that substantially allowed them to be bought and sold at or near face or par value. However, the tightening of international credit markets significantly affected the liquidity of both Grange and SCDOs generally. The SCDOs then held by the Councils (which I will refer to as “the Claim SCDOs”) could no longer be sold at or near face value on the secondary market made by Grange. In addition, a number of Claim SCDOs had suffered significant events that had reduced or eliminated the sum for which they could be redeemed at maturity. These consequences provided a practical illustration of significant differences between SCDOs, on the one hand, and, on the other, FRNs of the kind the Councils had invested in before they dealt with Grange.
The case involving each Council is based on its own individual facts and I will deal with each case separately later in these reasons. In broad and over-simplified terms, the Councils claimed that Grange acted in breach of contract, negligently and engaged in misleading or deceptive conduct in recommending, advising on, or explaining, to them or using its power in the IMP agreements to make, the investments in each of the SCDOs they held. In addition, they claimed that Grange acted in breach of its fiduciary duty as investment adviser or portfolio manager. The Councils argued in final address that, in essence, Grange acted in the circumstances in breach of its duty of care (in both contract and tort) or its fiduciary duty in failing to warn them about, or investing in SCDOs under the IMP agreements, by failing to inform the Councils of, or misrepresenting the nature of, three types of risk. This was because the Councils contended that:
(1)the SCDOs were either illiquid, in that there was no active or assured secondary market in them or they were materially less liquid than FRNs with an equivalent rating;
(2)the SCDOs had the risk of market price volatility. The Councils argued that this was because the price for which they could be realised depended on Grange being able to make a secondary market in, or itself buy back, an SCDO if a Council wanted to sell it before maturity;
(3)the SCDOs were not equivalent, as regards material risks, to other types of financial products carrying the same ratings because the rating assigned to each SCDO only addressed the probability of default and did not address:
(a) the market implied risk in the SCDO itself;
(b) the amount of loss in the event of default.
The pleadings cover an array of alleged risks, misrepresentations, breaches of duty and defences. A number of these had fallen to the wayside by the time of the parties’ closing written submissions and oral argument. It is not necessary to deal with those matters that were not substantively in issue at the time of the oral argument. Even complex litigation such as this cannot require the Court to phase and analyse in reasons for judgment a plethora of issues, pleadings or contentions that neither party thought decisive enough to argue seriously in final address.
The duty of all participants in litigation, including the Court, is encapsulated in the overarching purpose of the civil practice and procedure provisions of Pt VB of the Federal Court of Australia Act. It is to facilitate the just resolution of disputes according to law and as quickly, inexpensively and efficiently as possible (s 37M(1)). Of course, that purpose is facultative of the disposition of the substantive disputes as to the rights and obligations that the parties have put in issue in their litigation. Nonetheless, pleaded points and issues that have fallen by the litigious wayside should stay there. They should not burden the Court further by requiring attention to be given in reasons for judgment to dealing with them, when the parties did not rely on them at the concluding phase of their dispute in final submissions. In any event, if in these reasons I have overlooked a point of real substance that requires resolution, the parties will be able to raise it since I will not be pronouncing final orders dealing with the disposition of the Councils’ cases until after the parties have had the opportunity to address the form of those orders in light of these reasons.
2. The Councils’ claims
As the hearing progressed the Councils’ cases changed from their initial emphases on certain aspects of the SCDOs that they contended supported their cases to concentrate on a narrower, and, according to Grange in some instances unpleaded, range of issues.
Modern pleading in commercial cases is often antithetic to identifying the real issues. This is not necessarily the fault of a pleader. The plethora of available causes of action, statutory, common law and equitable, entrances pleaders into categorising the material facts into separately pleaded causes of action. In this case the final pleadings were over 200 pages long. Yet, as is almost invariably the case in such litigation, neither the written nor oral arguments actually analysed, subparagraph by subparagraph, each individual pleaded contractual term or representation.
At various points in the trial and argument, each party invoked the pleadings to support or attack a contention being advanced. All of the legal representatives were competent. They concentrated on the significant issues, which allowed for the emergence and disappearance of some issues as the case proceeded.
The claim SCDOs were highly complex financial instruments, underpinned by equally complex, and at points arcane, legal documentation to give them effect. None of the Council officers ever saw those legal documents. None of the actual transaction documents that established any claim SCDO was tendered in evidence. The closest approximation was a set of several hundred pages of the final documentation for the Blaxland SCDO, which the parties agreed was typical of almost all the Claim SCDOs. Nonetheless, three experts spent a day in concurrent evidence dealing with structural issues and differences in various claim SCDOs.
How was it that relatively unsophisticated Council officers came to invest many millions of ratepayers’ funds in these specialised financial instruments? That is the fundamental question at the heart of these proceedings. Each Council sought to explain that outcome by reference to aspects of its relationship with Grange. Importantly, a significant feature of the way in which Grange carried on its business was to target Councils, as potential or actual clients with ready access to very large sums of money for investment over short, medium and longer terms.
The Councils argued in submissions that Grange was a trusted financial adviser which had recommended these investments. In contrast, Grange contended that it was a mere seller of financial products and that had offered the Councils no financial advice, but merely made an accurate sales pitch for those products. I will deal with the nature and operation of Grange’s business in some detail later in these reasons. However, it is important to understand that each transaction for the sale or purchase of an SCDO by a Council involved Grange as a principal which either bought or sold the SCDO. The Councils were aware that Grange was acting for itself as a principal in these dealings, but not aware of any particular benefits it received from doing so. Grange, unlike the Councils, had the financial acumen, skill and capacity to analyse the risks associated with, and to make assessments of the value of, SCDOs as financial investments.
Each of the four principal bases on which the Councils claim against Grange requires consideration in light of the actual relationship between the parties. Since the relationship was governed by a contract, then that contract will provide a context for considering whether any further duty of care or fiduciary duty applied as well as for assessing whether any conduct by Grange was misleading or deceptive.
Contract: The contractual relationships fall into four categories. The first two are the relationships between Grange and each of Swan (before it entered an IMP agreement with Grange) and Parkes in respect of their dealings over the years 2003 to 2007 (the non-IMP contracts). The second two are the relationships between Grange and each of Swan and Wingecarribee under their respective, and differently worded, IMPs.
Non-IMP contractual issues: It is common ground that each of the purchases from, and sales by, Grange of SCDOs that was effected between it and each of Swan, before it entered its IMP agreement with Grange, and Parkes occurred pursuant to a separate contract for each individual transaction. One question is what, if any, additional terms formed part of each such contract, apart from those dealing with the uncontroversial issues of price, subject matter (i.e. what SCDO or other financial product was being purchased or sold) and settlement of the transaction. Swan and Parkes claim, and Grange disputes, that each non IMP contract also included terms that:
(1)the financial product would be suitable for an investor with a conservative investment strategy; i.e. a strategy to invest in debt instruments that:
(a)were either short term (less than one year term to maturity) or, if longer term, offered high levels of capital security rather than high rates of return;
(b)       were easily tradeable on established markets;
(c)       were readily able to be liquidated for cash at short notice;
(d)      had a secure income stream and little need for capital growth;
(e)       offered protection of capital to the extent this were possible;
(f)       were not derivative or synthetic financial products;
(g)were transparent as to the underlying asset backing and risk exposures in terms of any effect on return of an investor’s capital.
(2)the financial product would be suitable for the individual needs of the Council.
(3)Grange would provide the Council with all the relevant knowledge which it possessed regarding that financial product concealing nothing that might reasonably be regarded as relevant to the making of an investment decision.
(4)Grange would exercise reasonable skill and care in making any investment recommendations to the Council.
The Councils alleged, and Grange denied, that Grange breached these contractual terms. The bases on which the Councils claimed that Grange was in breach were because:
(1)each Claim SCDO purchased by each Council was not suitable for its individual needs.
(2)Grange did not adequately disclose to each Council any of a plethora of matters including:
(a)Grange’s significant commercial interest in the transactions involving claim SCDOs because of:
·Grange’s role and liabilities as placement agent or underwriter of the SCDOs or, after 7 March 2007, its relationship to its new parent, Lehman Bros or related companies as arrangers or credit default protection buyers of SCDOs Grange sold;
·the nature and extent of fees and commissions Grange earned from structuring and selling the SCDOs;
(b)Grange’s awareness of the terms of each of the Claim SCDOs and its having all the documentation for them in its possession.
(c)the nature of the Claim SCDOs resulted in their not meeting the various objectives of the Council’s conservative investment strategy because of the following features that I broadly summarise here but later will, where they are relevant, examine in detail and explain some of the terminology in section 3 of these reasons, namely:
·their synthetic nature and their complex structure;
·the risk of loss of capital;
·the impact on the return of capital to noteholders;
·the impact of various pleaded risks if the claim SCDOs were not transparent;
·their being highly leveraged and, in most cases, consisting of thin tranches, so that they were significantly sensitive to the performance of their reference entities;
·the lack of any active secondary market other than through Grange acting either as a buyer, seller or placement agent for such transactions with its other clients;
·they were “hold to maturity” investments with no right for a noteholder to redeem early;
·despite being rated for risk by ratings agencies, their risk profiles were different from, and not equivalent to, those of other financial products that had the same ratings as the Claim SCDOs;
·they were materially different from “traditional” FRNs;
·they were exposed to a number of unusual risks.
A number of the features and risks on which the Councils initially relied when they opened their case at the hearing fell by the wayside by the time of final address. I have set out in [7] above those that remained prominent at the latter time. Initially, the Councils had pleaded that the Claim SCDOs were also affected by rating migration risk (being the effect on the market value, rating and liquidity of the SCDO if there were ratings downgrades in the reference entities); correlation risk (being the effect on the market value of the SCDO from a number of contemporaneous or proximate credit events affecting several reference entities); credit event risk (being the use of the collateral provided to support the issuer of the SCDO to pay the credit default swap counterparty as a result of the occurrence of sufficient credit events. Such payments would deplete or eliminate the collateral from which the investors would be repaid the principal invested on maturity) and modelling risk (being the possibility that a market change could occur that was not provided for in the assumptions or modelling used in the SCDO that might affect its value).
Negligence: The Councils contended that Grange offered to, and did, provide them with investment advisory services. Grange denied that it acted in that capacity at all, except that it asserted that, after entering into IMP agreements with them, it provided each of Swan and Wingecarribee with the services it had contracted to provide under its respective IMP agreements.
The Councils alleged that Grange owed each of them a duty of care to ensure that correspondingly it provided financial services advice to the standard of a person with specialist skill and expertise in this field. The Councils asserted that Grange’s advice and its services were deficient in the respects set out in [7] above. They also alleged that Grange owed duties similar to a number of the contractual terms on which they relied including that:
·any investments that Grange made for, or recommended to, the Councils were consistent with a conservative investment strategy and complied with statutory and Council policy requirements;
·financial products that Grange recommended had ratings that were equivalent, as to risk, with investment grade ratings applied to other financial products;
·Grange would monitor the investments the Councils made on its recommendation and advise them whether or not to sell them;
·when recommending a financial product, Grange would conceal nothing that might reasonably be regarded as relevant to the making of a decision on whether or not to invest in it.
The Councils alleged that they relied on Grange in making their investments in each of the Claim SCDOs and suffered loss because of those investments and/or Grange’s non disclosures of matters the Councils relied on as its breaches of contract.
Grange contended that its relationships in its dealings with Parkes and, before their IMP agreement, Swan were those of arm’s length buyers and sellers of financial products. It argued that it had not breached any duty of care.
Misleading and deceptive conduct: The Councils alleged that Grange made representations to them that, in substance, repeated many of the asserted breaches of contract and duty of care. Grange disputed most of these except where they reflected the terms of an IMP agreement in respect of Swan and or Wingecarribee. Materially, these representations were that:
(1)investments, including the Claim SCDOs, that Grange recommended to, or made on behalf of, each Council:
(a)were suitable for investors with a conservative investment strategy (i.e. that in [18(1)] above); and
(b)complied with statutory and Council policy requirements.
(2)Grange observed prudent, conservative income defensive, capital protective and pro-liquidity practices when investing on behalf of local government authorities or investing with conservative investment strategies.
(3)the Claim SCDOs:
(a)were, or had, risk profiles (i.e, material risks) equivalent to, traditional FRNs;
(b)were equivalent as regards risk profile (i.e, material risks), to other types of financial products with the same rating;
(c)were, or had risk profiles (i.e, material risks), equivalent to or better than the four major Australian banks;
(d)offered excellent liquidity;
(e)were as liquid as traditional FRNs;
(f)were and would be readily redeemable in a secondary market;
(g)had maturity dates that were suitable to each Council’s needs and complied with its investment policies;
(4)Grange was active in the secondary market for SCDOs and was bound to buy back the Claim SCDOs, if requested to do so, to provide liquidity in illiquid products;
(5)the underlying risk exposures of any investment that Grange made would be fully transparent in terms of their effect on the payment of the coupon rate of interest and return of capital.

The Councils alleged that each of these representations was false and amounted to conduct that was misleading and deceptive in contravention of s 1041H of the Corporations Act 2001 (Cth) or s 12DA of the ASIC Act 2001 (Cth) as well as the Fair Trading Acts of New South Wales and Western Australia. They also contended that each of the representations in [25(2), (3)(d) to (g) and (4)] was a representation as to a future matter for which Grange did not have reasonable grounds at the time it made the representation. I explain below in [755] why I have equated the pleaded expression “risk profiles” with “material risks” in the pleaded representations..
Breaches of fiduciary duty: The Councils alleged that Grange owed each of them fiduciary duties:
(a)not to act in a position of conflict between its interests or duties and the interests of the Council;
(b)not to profit from its position of investment adviser or portfolio manager of the Council other than as provided in either relevant contract for sale of the Claim SCDO or the IMP agreement (as the case required).
The Councils alleged that Grange breached each of those duties by causing assets of each Council to be invested without the Council’s fully informed consent in respect of SCDOs in which Grange had a conflict of interest or duty in acting as a vendor to, or purchaser from, the Council. The Councils contended that as a result of Grange so acting in breach of its fiduciary duties it profited from its position as the relevant Council’s investment adviser or portfolio manager and or the Council suffered loss and damage.
3. SCDOS - General
I will describe the general characteristics of SCDOs shortly. This is in order to understand what may have been said or omitted when Grange’s officers explained, or suggested investment in, SCDOs to the Councils and their officers. However, each SCDO was a bespoke instrument, and so not every one may have each of these general characteristics. In addition, the description “SCDO” may not be apposite for a small number of the 39 instruments for which one or more of the Councils claim damages. However, all 39 were called “Claim SCDOs” by the parties. They were all structured products and had relevant similarities. As the parties did, I will deal with the few products that were not strictly SCDOs separately when it is necessary to distinguish them.
3.1 Grange’s expert credentials
The following description was common ground. Throughout the period from, at least, late 2002 to 2007 Grange marketed itself to local government authorities, as having had expertise and experience in their sector since 1995. From 2002 Grange trained its staff on the workings of collateralised debt obligations (CDOs) and SCDOs. It stated that this expertise and experience extended to:
·developing internal investment policies;
·co-ordinating and reviewing investment strategies;
·interpreting legislative requirements in respect of relevant investment criteria;
·the development of risk and return profiles;
·the active management of direct security portfolios;
·preparing and reviewing regular investment reports;
·co-ordinating revised investment strategies;
·interpreting and managing economic conditions through appropriate investment strategies.
In 2003, Grange had 30 specialist fixed interest staff providing what it described as a broad market experience and expertise. It claimed that it supported all of its recommendationsfor the products it sold to the Councils with rigorous research and due diligence that looked beyond the explicit credit rating. Moray Vincent, Grange’s director, debt capital markets made a presentation to councils at Orange, New South Wales in October 2004 in which he said that Grange:
·was a market leader and the most experienced underwriter of investment grade CDOs in Australia by number and volume;
·was able to negotiate larger issue sizes with arrangers on behalf of investors;
·partnered with arrangers to structure SCDOs to meet the time of maturity, rating, yield and differentiation desired by investors;
·thoroughly reviewed all aspects of each SCDO transaction and only approved those that Grange deemed both offered good value and were appropriate for its investors;
·had a dedicated team of experts with leading product knowledge.
By 2006, Grange was advising 85 councils in New South Wales, 40 in Victoria and 12 in Western Australia. It asserted that it had a detailed understanding of the local government market that was unmatched in the financial markets. Grange relied on its expertise to claim that its product development for the local government market was “… focused specifically to meet the financial needs of local government within the parameters of relevant legislation”. Grange said that it had the largest fixed interest sales team of any financial institution in Australia.
And Grange accepted in its written submissions that it had represented to both Parkes and Swan that it had conducted “rigorous analysis” of each SCDO prior to marketing that SCDO to its clients. Thus, in the slide presentation that Grange gave in mid 2003 to Swan before it purchased the Forum AAA SCDO, it promoted itself as follows on a slide “Work Grange Does Before it Recommends a Transaction”:
“Grange does a rigorous analysis of each deal (beyond the formal rating provided by S&P) before recommending it to clients. This includes:
·     Checking the credit quality of all the underlying entities using their CDS trading prices and KMV scores (a credit rating model based on equity prices);
·     Checking the tranche credit rating using its own proprietary binomial and multiple binomial models (similar to Moody’s methodology);
·     Conducting a ratings transitions analysis assessing the current CDO market and CDS markets.”
3.2               A brief overview of SCDOs traded by Grange in 2002-2007
Grange acted as the vendor, placement agent or underwriter in respect of at least 51 SCDOs between 2002 and 2007. Each SCDO was given a name under which it was marketed. The products were also called “notes”. This was usually a locality. Grange began marketing its first SCDO in early November 2002. It was called “Gibraltar AA” but none of the Councils acquired it at that time. The first SCDO acquired by any of the Councils was called “Forum AAA”. Grange placed or underwrote Forum and sold it to Parkes in March 2003 and Swan in September 2003. In June 2007, Grange sold or underwrote its final SCDO, “Merimbula BBB”. The total face value of these products ranged in size from $7 million for the Gibraltar product in 2002, to $135 million for the Newport AAA product in February 2006. In the period between 2002 and 2007 Grange dealt with a number of issuers and arrangers most of which were, or were subsidiaries of, well known banks or investment banks such as ABN Amro, Deutsche Bank, Credit Suisse, BNP Paribas, Nomura, Barclays Capital, Calyon, HSBC, Merrill Lynch, Morgan Stanley and Lehman Bros.
After Lehman Bros acquired Grange in March 2007, the new SCDOs sold by Grange were arranged or issued by a Lehman Bros entity. I will need to deal with a particular problem that these products had in section 6.1 below. Grange also engaged in arranging “switches” of its clients’ holdings in SCDOs. In a switch transaction Grange would buy a particular SCDO or product from its client and at the same time sell another SCDO or product to the same client; hence the client “switched” its investment from one product to another.
As I will explain in more detail below, each SCDO had a “maturity date”. That was the time at which any money, including interest due by the issuer, had to be paid to the note holders or owners of interests in the instrument. Some SCDOs had “call dates”, earlier than the maturity date, on which the issuer or the arranger could elect to pay the money that would otherwise only be due at the maturity date. Between 2002 and 2007, seven SCDOs that Grange had placed or underwritten reached final maturity and investors received back the sum they had invested together with all interest that had been payable. Seven of the other SCDOs were fully bought back by their arranger before maturity, after Grange had acquired them from its clients and any other holders, often through switches, in circumstances that I will discuss later in these reasons.
In general, Grange engaged in switches, first, to facilitate a buy back by the arranger of some or all of the issued notes or interests in an SCDO prior to the date of maturity of the SCDO, or, secondly, to achieve a rearrangement of various clients’ holdings or its (Grange’s) own risk, as I will also explain later in these reasons.
The first switch from one SCDO to another involving one of the Councils occurred in February 2004 when Grange recommended to Parkes that it sell Griffin and purchase Balmoral. The number of switches that Grange promoted to, or arranged for, its clients grew significantly from 2005. Thus, in the period between 2005 and 2007, Grange recommended 16 switch recommendations to Parkes. As I will explain below, some of those switches appeared to have no commercial purpose from Parkes’ perspective.
3.3 The nature of the Claim SCDOs
Each of the Claim SCDOs was a structured finance instrument. In January 2005, a working group of Committee on the Global Financial System of the Bank for International Settlements published a report “The role of ratings in structured finance: issues and implications” (CGFS publication No 23) (the 2005 Working Group report). This report described these products as having 3 key characteristics: first, pooling of assets which can be either cash based or synthetically created; secondly, tranching of liabilities that are backed by the asset pool; and thirdly, de-linking of the credit risk of the underlying or “portfolio” asset pool (such as loans, bonds or residential mortgages) from the credit risk of the originator (or arranger) that is usually done through its stand alone, special purpose vehicle. The second characteristic, tranching, differentiates structured finance from what the Working Group described as traditional “pass-through” securitisations (being an instrument issued by a borrower that gives the lender recourse to the company’s assets).
The conceptual structure and operation of an SCDO was explained by Paul Hattori, an expert in credit derivatives and capital markets. He had been called by Grange. In an SCDO transaction, a special purpose vehicle (SPV), usually resident in a tax neutral jurisdiction, “issues debt”. That is, the SPV creates an obligation, typically in the form of notes or other instruments promising to pay a return to a person who invests in or lends funds to the SPV. The money invested or lent is placed in a highly rated asset, such as a bank deposit, a bond or an insurance contract. That asset is called “collateral”. The SPV will receive periodic payments of interest earned on the collateral. The SPV then enters into a derivative contract with an investment bank in the form of a portfolio credit default swap (“PCDS or swap”). The investment bank is called the “swap counterparty”. It pays a regular premium to the SPV. The investment returns on the collateral and the regular premiums paid by the swap counterparty enable the SPV to pay the interest due on the note to the note holders and the balance to the issuer, as its profit.
If all goes well, the issuer can exercise its right to call in the notes on the call date or at the maturity date. If, at that time, there has been no default under the PCDS requiring the SPV to pay the swap counterparty some or all of the collateral (as explained below), then the SPV terminates the PCDS, realises the collateral and uses the proceeds to repay the face value of the notes. Thus, payment of the whole or some of the investor’s interest and principal will be dependent on the SPV not being required to pay the swap counterparty money under the PCDS.
The swap works as follows. Usually, the terms of an SCDO will provide for the issuer to repay or return the face value original price to an investor on the maturity date together with any outstanding interest. In addition, most of the Claim SCDOs had a term entitling the issuer to call the notes in and repay them early on its call date. This was usually between 3 and 5 years after the initial issue date. The issuer’s incentive to exercise its right to repay on the call date was that, if it did not, there was an increase in the interest rate payable thereafter.
The PCDS identifies a notional portfolio of what are called “reference entities” and defines various “credit events”. The reference entities in the Claim SCDOs are typically, but not always, liabilities of companies listed on one or more stock exchanges that are rated by credit rating agencies. The PCDS defines the particular loss that, for its purposes, is attributed to the occurrence of the credit event. For example, if a reference entity defaults in paying interest, the PCDS will define that as a credit event and attribute a loss to the holders of debt issued by the reference entity. Then, the PCDS will deem the notional portfolio to have suffered a loss. The credit events may also be defined in the PCDS as a default in one of reference entities or a downgrading of its, or its issuer’s, credit rating. The corollary of that loss to the portfolio’s value is that the PCDS will attribute a “recovery” value to it.
Mr Hattori explained that the aim of the PCDS is to transfer credit risk on the portfolio from the swap counterparty (investment bank) to the SPV. That transfer of risk occurs under the provisions of the PCDS dealing with the consequence of a credit event experienced by a reference entity. In addition, the terms of the PCDS may include rules or portfolio guidelines for changing one or more of the reference entities. The PCDS can provide for the portfolio of the PCDS to be actively managed, so that the manager can replace an entity in the reference portfolio that it anticipates is likely to suffer a credit event with one that it considers to pose a lesser risk. Alternatively, the PCDS may not allow any substitutions or changes in the reference entities.
The terms of the PCDS will define how the recovery value is determined. Typically, the recovery value may be a predetermined fixed amount of the debt issued by the relevant reference entity or it may be determined by the then current market value of that entity’s debt obligation (called a “floating” price). The following example illustrates the way in which the PCDS will take account of the recovery value: if a bond with a face value of $100 trades at $60 after a credit event, the portfolio will, first, suffer a loss of 40% of the bond’s notional $100 value and have a “recovery” of 60%: i.e. the terms of the PCDS deem that the portfolio will recover only 60% of its original valuation of the bond. The consequence of a credit event is that the notional portfolio will be deemed by both the SCDO and PCDS to have suffered a loss. In the case of the example, the deemed loss will be 40% of the original face value of the debt of the reference entity. This loss may then result in the SPV being required to make a payment to the swap counterparty, as if to compensate it.
The reference portfolio and the “loss” are both “notional” in the sense that, first, the parties to these arrangements have not directly invested in any of the debt or issuing corporations in the portfolio and, secondly, it is not necessary for anyone at all to suffer an actual loss. For example, the reference entity that suffered a credit event, deemed by the PCDS to cause a loss for its purposes, may only have suffered a downgrading of its credit rating or missed an interest payment but may later pay the whole of its debt and interest to its creditors. Nonetheless, the terms of the SCDO and PCDS will treat the credit event as a once for all occurrence resulting in a final, deemed loss that is quantified in the way I have described. This feature, of detachment of performance of the notional portfolio from any underlying real world losses sustained by the parties to the transaction, is one reason why the CDOs are called “synthetic”.
The SPV issues debt or notes of different levels or tranches of seniority. This operates much like layers of cover operate in insurance and reinsurance markets. Thus, the lowest or first tranche bears the first losses in the reference portfolio. Until the losses exceed the value of that lowest tranche, the tranches above it remain intact, although they will be more vulnerable to the impact of future credit events. This is because after an initial loss or losses to the lowest or lower tranches, a lesser number of further credit events will now stand between the layer or tranche covered by the SCDO and its corresponding PCDS.
Ordinarily, different persons will invest in the different issued layers or tranches of an SCDO just as different insurers or reinsurers accept risk on different layers of cover. Mr Hattori provided the following diagrammatic representation of an example of the primary cash flows in a fully funded SCDO structure:
Figure 1
One way Mr Hattori used to describe how the layers or tranches operate, was in terms of the percentage loss each suffered on the underlying portfolio. There can be more or less tranches than in the example illustrated in figure 1. He gave an example where the first loss layer (the “equity” tranche in figure 1) covered the first 5% of losses. That layer has what is called an “attachment point” or “threshold” or “subordination” of 0%. That is, the tranche’s direct exposure to a loss occurs immediately, since there is no tranche below the first. The tranche has what is called a 5% “thickness” or “exhaustion” or a variation of these terms. This tranche will absorb up to the first 5% of losses. The second loss layer, or tranche (the “junior” tranche in figure 1) might cover, say, the next 4% of losses. It will be said to have a 5% lower attachment point, subordination or threshold, with 4% exhaustion, 5%-9% or “5-9” attachment points, or similar.
The holders who own interests in a tranche above the lowest will only suffer loss on their investment (as distinct from its market value) after the losses in all lower tranches have passed each lower tranche’s exhaustion point or “wiped out” those tranches. Once that occurs, the attachment point of the holder’s tranche has been reached and any further losses in the notional portfolio will have a direct effect in two ways: first, the principal sum on which interest is calculated will be reduced to reflect the remaining proportionate thickness of the holder’s tranche, secondly, the sum payable on the maturity date will be reduced to the same proportion of the face value of the SCDO or the note issued to the holder in respect of it.
The lowest tranche carries the greatest risk of loss. Thus, the risk taken on by the SPV for a particular tranche in an SCDO is that it will have to pay the swap counterparty from the collateral if notional losses occur on the notional portfolio within the attachment and detachment points of the tranche. Once the collateral is reduced, the SPV usually will have a smaller investment on which to earn interest to pay the coupon or interest due to holders of the SCDO, and concomitantly a smaller sum with which to pay the amount due on maturity. Depending on the terms of the SCDO and PCDS, if a credit event occurs the partial realisation and payment of the collateral may be required immediately or be deferred until maturity. In some cases, the SPV can issue debt obligations and enter into a PCDS that covers only one tranche or different tranches and these can be in different currencies and in different sizes.
3.4 The types of Claim SCDOs

It was common ground that the Councils understood Grange was their vendor. Thus, their funds went to pay Grange, not to go into any pool or common enterprise: i.e. the clients’ money went figuratively into Grange’s pocket. The investors never intended their money to be pooled or used in a common enterprise. They paid Grange as their vendor. Grange was not, and no-one intended it to be, the agent of the issuer of the notes or of its clients.
It follows that Grange’s argument that typical SCDOs were managed investment schemes must be rejected.
9.3.3Consideration – derivatives
The investment of Wingecarribee’s funds in the Claim SCDOs breached the prohibition against investment in derivatives contracts in Sch 2 of the Wingecarribee IMP agreement because those products were derivatives contracts.
10. Common questions
10.1 The common questions identified?
10.1.1The role of common questions
Proceedings such as these brought under Pt IVA of the Federal Court of Australia Act must meet certain criteria that the Act prescribes. Importantly, s 33C provides:
33C     Commencement of proceeding
(1)       Subject to this Part, where:
(a)       7 or more persons have claims against the same person; and
(b)the claims of all those persons are in respect of, or arise out of, the same, similar or related circumstances; and
(c)the claims of all those persons give rise to a substantial common issue of law or fact;
a proceeding may be commenced by one or more of those persons as representing some or all of them.
(2)       A representative proceeding may be commenced:
(a)       whether or not the relief sought:
(i)        is, or includes, equitable relief; or
(ii)       consists of, or includes, damages; or
(iii)includes claims for damages that would require individual assessment; or
(iv)      is the same for each person represented; and
(b)       whether or not the proceeding:
(i)is concerned with separate contracts or transactions between the respondent in the proceeding and individual group members; or
(ii)involves separate acts or omissions of the respondent done or omitted to be done in relation to individual group members.
For the purposes of s 33H(1)(a) the Councils identified the claimants in the group as persons who, between 28 March 2003 and 21 August 2008, acquired one or more of the Claim SCDOs from Grange or in reliance on representations it made, as a result suffered loss or damage and entered a litigation funding agreement with a named litigation funder before the proceeding was constituted as a class action. The Councils were required to describe the claimants i.e. group members (s 33H(1)(a)) in their originating application, or a document filed in support of it, and specify:
·the nature of the claims made on behalf of the claimants and the relief claimed (s 33H(1)(b));
·the questions of law or fact common to the claims of the group members (s 33H(1)(c)).
In referring to a “substantial common issue of law or fact”, s 33C(1)(c) is concerned with an issue that is real or of substance: Wong v Silkfield Pty Ltd (1999) 199 CLR 255 at 267 [28] per Gleeson CJ, McHugh, Gummow, Kirby and Callinan JJ. It is not necessary that any such issue will be likely to resolve, wholly or to a significant degree, the claims of all group members: Wong 199 CLR at 267-268 [30].
Moreover, the Court has powers in proceedings under Pt IVA to give directions in relation to the determination of issues that are not immediately resolved under ss 33Q and 33R. Critically, s 33Z(1) relevantly provides:
33Z     Judgment—powers of the Court
(1)The Court may, in determining a matter in a representative proceeding, do any one or more of the following:
(a)       determine an issue of law;
(b)       determine an issue of fact;
(c)       make a declaration of liability;
(d)       grant any equitable relief;
(e)make an award of damages for group members, sub-group members or individual group members, being damages consisting of specified amounts or amounts worked out in such manner as the Court specifies;
(f)award damages in an aggregate amount without specifying amounts awarded in respect of individual group members;
(g)       make such other order as the Court thinks just.
10.1.2The common questions posed by the Councils
The Councils pleaded that a large variety of common questions of law or fact were raised by the proceedings. A number of these were not pressed or argued as issues. Grange accepted that a limited number of these questions were raised as substantial common questions of law or fact as required by s 33C of the Federal Court of Australia Act. I will summarise and group together below those questions that I understood were pressed and are potentially capable of resolution. The precise formation of any answers that should be given to these questions is best left to the parties to address after these reasons have been published. The relevant common questions are:
(1)Did the Claim SCDOs have the various and detailed features pleaded: see [19]-[20]?
(2)Were the Claim SCDOs investments that were consistent with:
(a)conservative investment strategies;
(b)the investment requirements of the Local Government Acts and Trustee Acts of Western Australia and New South Wales?
(3)Did Grange owe a duty to the claimants to exercise reasonable skill and care as an expert in providing them with financial advice and, if so, did it breach that duty as alleged: see [21]-[23]?
(4)Did Grange make to claimants the representations alleged and, if so, did it engage in conduct that was misleading and deceptive: see [25]-[26]?
(5)In respect of claimants with which it did not have an IMP agreement (the non-IMP claimants), did Grange:
(a)make contracts with them that contained the terms alleged and, if so, did it breach those contracts: see [17]-[18]?
(b)owe them fiduciary obligations, and, if so, did it breach those obligations or sufficiently obtain the claimant’s informed consent to act in a position in which it had a conflict: see [27]-[28]?
(6)In respect of claimants in Western Australia with IMP agreements (the WA IMP claimants):
(a)did Grange invest in products that were consistent with the requirements of:
(i)the investment guidelines in Sch 2 pursuant to cl 2.3(a) of the IMP agreements (see [359], [362]); and
(ii)the Local Government Act (WA);
(b)what did Grange have to do to discharge its obligations under the IMP agreements;
(c)did Grange have a conflict, and, if so, did it sufficiently obtain the claimant’s informed consent to its acting under the IMP agreements: [27]-[28]?
(7)In respect of claimants in New South Wales with IMP agreements (the NSW IMP claimants):
(a)did Grange invest in products that were consistent with the requirements of:
(i)the investment guidelines in Sch 2 pursuant to cl 2.3(a) of the IMP agreements (see [638]; and
(ii)the Local Government Act (NSW);
(b)were the Claim SCDOs:
(i)derivative contracts;
(ii)CDOs.
(c)what did Grange have to do to discharge its obligations under the IMP agreement;
(d)did Grange have a conflict, and, if so, did it sufficiently obtain the claimant’s informed consent to its acting under the IMP agreements: [27]-[28]?
(8)What are the correct principles for measuring damages?
I will deal with whether these questions arise as common questions and how to approach their resolution below. The Councils made separate final written submissions on the findings that ought be made on the common questions. For the most part these submissions were unhelpful, because they repeated the Councils’ pleadings without referring to evidence or the basis on which the matters were or had remained real issues.
10.2 Common questions – consideration
10.2.1Question (1): The features of the Claim SCDOs
Grange accepted that question (1) was a common question but only to the extent that the particular features of the Claim SCDOs, that are summarised in [19] were addressed in submissions. I accept that Grange’s qualification is appropriate for this and the other common questions. As I noted at [20], much of the detail in the Councils’ pleading had fallen by the wayside as the hearing progressed. They did not put any substantive argument on these matters and it would not conduce to the efficient disposition of these proceedings to spend any time addressing them.
The substantive common issues of fact relating to the Claim SCDOs that I have resolved in these reasons are that:
·the Claim SCDOs had three key characteristics of structured finance: pooling of assets, tranching of liabilities and de-linking of the credit risk of the reference portfolio from that of the arranger: [39];
·what the conceptual structure and operation of the Claim, and other, SCDOs were, being described in section 3.3;
·what the types of the Claim SCDOs were, being described in section 3.4;
·what were the relevant risks of the Claim SCDOs (see [64]), namely market implied risks (section 3.5.1), the risk in respect of the amount of loss (section 3.5.2), market price volatility (section 3.5.3) and liquidity risks (section 3.5.4).
These features and risks apply to each of the Claim SCDOs. Thus, each claimant will be affected by these findings of fact in respect of its individual claim.
I am of opinion that my determinations of fact in respect of these matters should bind Grange and all the other claimants for the purposes of s 33Z(1)(b). I will hear the parties on whether it is necessary to make declarations to give effect to those matters or whether, as I consider may be preferable, to determine that my findings create issue estoppels that, given the constitution of the proceedings, binds both Grange and each and every claimant: cp Blair v Curran (1939) 62 CLR 464 at 531-533 per Dixon J. This approach will also assist in resolving how effect should be given to the answers to any other common questions.
10.2.2Question (2): Were the Claim SCDOs consistent with conservative investment strategies or investment requirements in legislation affecting local government bodies or trustees?
I have determined that representations (1)(a) and (2) were made and were false in section 6.4.2. These dealt with the first part of question (2), namely the question of whether the Claim SCDOs were consistent with conservative investment strategies: section 6.4.2. In addition, the findings as to why contractual term (4) was made (sections 5.1.1 and 5.2.1) and why it was breached (section 6.2.5) are relevant to this issue. Whether one or more of the other claimants had had a conservative investment strategy or required products, in their dealings with Grange, that were consistent with such a strategy, may require further evidence. On the other hand, depending on whether the parties accept my findings or the outcome of any appeal, Grange’s liquidators may be able to be satisfied of such matters, for the purposes of admitting a proof of debt in the liquidation or a claim in these proceedings, by examining a claimant’s financial records and other material to justify such a conclusion.
I have determined the construction of the legislative provisions governing investment of local government council funds in Western Australia ([157], [790]; section 6.2.7) and in New South Wales ([413]-[417], [610]; section 6.2.7) and the operation in respect of investments by persons bound to apply the prudent person test pursuant to the Trustees Act (WA), in Western Australia ([790]; section 6.2.7) or the Trustee Act in New South Wales ([417]; section 6.2.7). These are appropriate to treat as determinations of issues of law for the purposes of s 33Z(1)(a).
10.2.3Question (3): What was Grange’s obligation or duty to exercise reasonable skill and care and did it breach that obligation or duty?
The determinations I have made as to Grange’s contractual obligation and tortious duty to exercise reasonable skill and care and its breaches of those (referred to in section 10.2.2) will apply, in the absence of some unusual exclusion or circumstance, to Councils who are claimants in Western Australia and New South Wales with such adaptions as may be necessary to take account of any differences in the particular Councils’ investment policy from those of Swan, Parkes or Wingecarribee.
Whether Grange’s obligation or duty and any breach would be assessed differently for claimants who were neither Councils nor trustees will need to be considered in individual cases. The content of the contractual obligation and tortious duty to exercise reasonable skill and care will necessarily be dependent on the particular relationship of Grange and the individual claimant. However, the answers to this and other questions as resolutions of common issues under s 33Z(1)(a) or (b) may have utility, first, in resolving potential issues that arise from similar facts if the proceedings continue for the purpose of determining each of the remaining claimant’s rights, if any, against Grange, or secondly, in assisting Grange’s liquidators in considering whether to admit the proofs of debt of particular claimants as creditors in its liquidation.
The evidence in the proceedings disclosed that Grange used similar themes and engaged in similar conduct concerning the SCDOs, including the Claim SCDOs, that it sold to each of the three Councils, either in individual sales to Swan, before the IMP agreement, and to Parkes, or in the use of its mandate under its IMP agreements with Swan and Wingecarribee. It portrayed itself as an “adviser” to local government councils. For example, on 30 May 2007 Mr Kay emailed Swan’s Mr Cameron, introducing himself, saying:
“As I am sure you are aware, the City has utilised Grange as an investment adviser since 2003.”
And in July 2007, Grange put, to Mid-Western Regional Council, an expression of interest for investment advisory services. That stated that Grange, through its fixed interest division, had been “actively involved in developing and managing investment portfolios for a wide range of local government and private sector clients for 12 years”. The document noted that local government councils’ “investment portfolios vary in size on a regular basis owing to the impact of continuing cash flows”. It set out a list of Grange’s clients with IMPs and those with “Advisory Portfolios” saying that, among a long list of others, Parkes was a council “where Grange acts in an advisory capacity outside the IMP process”. As Ms Perrott’s August 2005 risk management overview noted, from Grange’s perspective, it was dealing with portfolio management of its clients as “sausages”.
Thus, it is likely that there will be similar, but as with each of the three Councils, not exact, dealings between Grange and, at least, the other Councils who are claimants. In addition, it is likely that similar slide presentations, switch recommendations, product information and email sales pitches were used by Grange on its broader client base for the Claim SCDOs.
For these reasons, determining the issues of law and fact that were common in the three Councils’ individual cases under s 33Z(1)(a) and (b) may have substantial utility in resolving the balance of the claimants’ cases in this group proceeding. Accordingly, my findings of the contractual obligation and tortious duty in sections 5.1.1, 5.1.5, 5.2.1, 5.2.4, 5.3.1 and 5.3.3 and of Grange’s breaches in sections 6.2.7, 6.2.8, 6.2.9 and 6.5 ought be used, so far as possible, as determinations of those issues of law and fact under s 33Z(1)(a) and (b).
10.2.4Question (4): Did Grange engage in conduct that was misleading or deceptive?
In sections 5.1.3, 5.2.3 and 5.3.2, I found that Grange made the same representations to each of the three Councils and in section 6.4 I found that, by making them, it engaged in conduct that contravened s 12DA(1) of the ASIC Act. In addition, I also made findings in section 5.1.4 rejecting the Councils’ claims that some of the alleged contractual terms and representations were made, which should also be treated as determinations of an issue of fact under s 33Z(1)(b). In my opinion, the findings that I have made on these issues should also be treated as determinations of law or fact.
Grange argued that the resolution of these issues with other claimants will depend on the particular circumstances of the relationship and dealings that each claimant had with Grange.
Once again, that argument is correct as far as it goes. But, it overlooks the common, albeit differently nuanced, way in which the evidence revealed Grange dealt with each of the three Councils in informing them of the matters the subject of the representations that I found it made.
10.2.5Question (5): What contracts were made between Grange and its non IMP claimants, what, if any, fiduciary obligations did Grange owe and what, if any, breaches were there of either?
These questions deal with the incidents of the relationship between Grange and each of Swan, before its IMP agreement, and Parkes and how they bear on the position of other non IMP claimants. Once again, Grange correctly contended that the particular factual setting for each individual claimant would be crucial to the determination of the contract(s) it made with Grange and whether any particular fiduciary relationship existed.
However, Grange approached each of Swan and Parkes for the initial sale of an SCDO, which happened to be the same one for both (the Forum AAA product) in a similar, but again, differently nuanced, manner. Grange sent each Council a letter but in differing terms, explaining Grange’s approach to investment advice for Councils and the products it recommended. It also gave different documents to each Council. For example, in Swan’s case, Grange made a slide presentation on the Forum AAA product but did not do this for Parkes [439]. Nonetheless, I found that, at the end of its negotiations with each of Swan and Parkes, they made a contract for the purchase of the Forum AAA product that had the same terms: sections 5.1.1, 5.2.1. It is likely that Grange dealt on this basis with other claimants.
And, I also found that at the same time, Grange had assumed fiduciary obligations that it owed to each of Swan and Parkes: sections 5.1.2 and 5.2.2. Given that Grange portrayed itself as a financial adviser to each of the Councils that result was likely: Daly 160 CLR 371. It is also likely that Grange portrayed itself consistently, albeit with subtle or nuanced variations, to the other claimants, both those with and without IMP agreements, as the example of Grange’s expression of interest to Mid-Western Regional Council showed: [1229].
It is significant that the contractual terms, representations and fiduciary relationship I have found in respect of Grange’s dealings with Swan, before the IMP agreement, and Parkes were substantially the same despite the two Councils being on opposite sides of Australia. These findings are consistent with Grange’s business model, summarised by Ms Perrott’s “sausage” analogy. Grange’s sales pitch to each Council was similar and it is likely that this consistency was not accidental. Moreover, Grange called no evidence from any of its former employees who could have negated or contextualised how it dealt with any of the three Councils to put this apparently consistent method of dealing into a different perspective. Mr Clout’s confident instruction to his staff of 9 August 2004 to effect switches “[a]s we control the cdo market we should be able to execute any of these without issue”, revealed that Grange knew it had the trust and confidence of its clients [300]-[301]. And, of course, Mr Vincent’s later “no hair cut repo” email reinforced that the very features of terms (1)-(4) of the contracts (see [843]) underpinned how Grange could benefit itself in borrowing from its clients, using their trust in it and its products, without offering those clients sufficient security for the loans.

Accordingly, I consider that the findings that I have made on the contractual terms and fiduciary relationship should be determinations of issues of law and fact under s 33Z(1)(a) and (b). Likewise, the findings of breach of the above contractual terms in sections 6.2.2-6.2.5 and of there being no breach of term (5) in section 6.2.6 should be determinations of law and fact. If the contracts with claimants contained those terms, there could be no issue that there should also be a consistent conclusion that they were breached.
Once again, the particular circumstances of a claimant may need to be examined on the contractual or fiduciary issues. But I think that there is also utility, given Grange’s apparent mode of conducting its business relations with its clients, in making determinations of law and fact based on my findings of Grange’s breaches of its fiduciary obligations in sections 6.3.1 and 6.3.2. It is unlikely that Grange would have obtained fully informed consent from any claimant, since it seemed unaware of the need to do so.
10.2.6Question (6): What rights did the Western Australian IMP agreement claimants have?
If other claimants with IMP agreements in Western Australia contracted on identical terms as Swan had, there would be utility in making determinations of fact and law consistently with my findings of the terms of the Swan IMP contractual relationship and Grange’s fiduciary obligations under it (section 5.1.5) and of Grange’s breaches (section 6.2.8). Any Western Australian council claimants should have the benefit of the findings of law and fact in section 6.2.8 that the Claim SCDOs were not prudent investments for the purposes of s 6.14 of the Local Government Act and s 18(1) of the Trustees Act. There would also be utility in making such determinations in any event in relation to the fiduciary issues, since it is unlikely that Grange saw the need to obtain, or received, a claimant’s fully informed consent.
10.2.7Question (7): What rights did the New South Wales IMP agreement claimants have?
I consider it appropriate to make similar determinations on these questions in respect of New South Wales IMP claimants as in section 10.2.6, in respect of my findings in sections 5.3.1 and 6.2.9. Any New South Wales claimant council should have the benefit of the findings of law and fact in section 6.2.9, including my findings that investments in SCDOs were not prudent: [929]. I also consider it appropriate to determine the issues of law and fact in relation to whether the Claim SCDOs were derivatives as in section 9.
Grange argued that Wingecarribee and the claimants ought not be permitted to rely on the contention that the Claim SCDOs were not CDOs within the meaning of Sch 2 of the Wingecarribee IMP agreement: [638]. It said, correctly, that no submissions were made on this issue. I agree. There was no live issue in the trial on this point. In any event, as I found at [921]-[922] under the Wingecarribee IMP agreement it would potentially have been possible for Grange to invest in structured products and CDOs, including SCDOs. However, any such investment still had to meet the prudent person test. I found that investing in the Claim SCDOs did not: [923]-[924]. Accordingly, I do not consider that there was any common question concerning the expression “CDO” in Sch 2 to the Wingecarribee IMP agreement.
10.2.8Question (8): What are the correct principles for measuring damages?
Grange accepted that the principles on which damages should be measured were appropriate common issues of law and fact. Subject to any issue as to the appropriateness of updating the valuations, I consider that I should make determinations using the principles as explained in section 7.
11. Conclusion
The preparation of these reasons has taken longer than I had intended because of the detail and complexity of the parties’ cases and the issues that required resolution.
The parties should have an opportunity to consider these reasons and discuss the appropriate orders that should be made to give effect to them, including the precise wording of determinations of issues of law and fact under s 33Z(1)(a) and (b), the giving of directions to the liquidators of Grange (see [1077]) and updating the valuations, if appropriate, that I have arrived at in section 7. They should also be able to identify any oversights or errors that can readily be corrected so as to avert any unnecessary issue in any subsequent appeal.
I will direct the parties to prepare draft orders and submissions on matters on which they have not agreed or are still to be resolved.

I certify that the preceding one thousand two hundred and forty seven (1247) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rares.
Associate:
Dated: 21 September 2012

Citation:		Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) [2012] FCA 1028
Parties:		WINGECARRIBEE SHIRE COUNCIL, CITY OF SWAN and PARKES SHIRE COUNCIL v LEHMAN BROTHERS AUSTRALIA LIMITED (IN LIQUIDATION) (ACN 066 797 760)
File number:		NSD 2492 of 2007
Judge:		RARES J
Date of judgment:		21 September 2012
Corrigendum:		1 October 2013 22 November 2012
Catchwords:		CONTRACT – implication of terms – construction of written and oral contracts for purchase or sale of complex financial products – construction of written contract authorising respondent to undertake transactions on applicants’ behalf NEGLIGENCE – implied contractual term and co-extensive tortious duty of financial adviser to exercise reasonable skill and care in making recommendations giving advice to, or acting on behalf of client in making investments – whether obligation or duty affected by written disclaimers – whether disclaimer sufficient to exclude liability for negligence in oral statements recommending or advising a course of action – where disclaimer purports to exclude liability and assumption of responsibility for financial advice and urges reader to seek advice from its own financial adviser – where author of disclaimer is client’s financial adviser – whether client affected or bound by disclaimer – whether applicants were contributorily negligent TRADE PRACTICES – misleading and deceptive conduct – whether respondent engaged in conduct that was misleading or deceptive contrary to s 12DA(1) of the Australian Investments and Securities Commission 2001 (Cth) – where pleaded representations made orally and in written material – where disclaimers appearing in small print on written materials qualified or contradicted oral assertions – where written disclaimers were not repeated orally or otherwise drawn to the applicants’ attention – whether person relying on representation failed to take reasonable care for purposes of s 12GF(1) of the Australian Securities and Investments Commission Act 2001 (Cth) EQUITY – fiduciary obligations – relationship between financial adviser and client – whether respondent owed fiduciary obligations to applicants in recommending or effecting transactions or giving financial advice – where respondent earned large profits from its sale of financial products to its clients including applicants – where such fees not disclosed – whether contractual term entitling client to request disclosure of any fees sufficient to relieve fiduciary of need to obtain fully informed consent – whether disclosure to client of possibility that respondent may earn fees sufficient to relieve fiduciary of need to obtain fully informed consent – whether respondent obliged (a) not to obtain an unauthorised benefit from the fiduciary relationship, and (b) not to be in position of conflict between the fiduciary’s interests and duties and interests of the applicants – whether respondent breached duty in failing to warn applicants about the risks associated with investments it recommended to or made on behalf of the applicants VALUATION –principles applicable to valuation of securities – whether, where no actual or sufficient market transactions, judicial valuer can rely on bids as evidence of value of illiquid securities DAMAGES – whether ‘left in hand’ test or difference between price and true value appropriate measure of damages in contract, tort or under s12GF(1) of the Australian Securities and Investments Commission Act 2001 (Cth) – where applicants induced to buy securities – where securities did not have properties warranted in contract – where recommendation or advice to buy securities given negligently – where recommendation or advice to buy securities misleading or deceptive PRACTICE AND PROCEDURE – group proceedings brought pursuant to Pt IVA of the Federal Court of Australia Act 1976 (Cth) – whether common questions of fact or law determined in representative proceeding
Legislation:		Australian Securities and Investments Commission Act 2001 (Cth) s 12GF, 12GP, 12GR Civil Liability Act 2002 (NSW) ss 5B, 5C, 5D, 5E, 5O, 5R, 5S Civil Liability Act 2002 (WA) ss 5B, 5C, 5D, 5K Competition and Consumer Act 2010 (Cth) Sch 2, s 18 Corporations Act 2011 (Cth) Pt VB, ss 9, 554(1), 708(8), 761D, 764A, 769B, 912A, 991E, 1041H(1) Corporations Regulations 2001 (Cth) reg 7.8.20(1A) Federal Court of Australia Act 1976 (Cth) Pt IVA Law Reform (Contributory Negligence and Tortfeasors’ Contribution) Act 1947 (WA) ss 3A, 4(1) Law Reform (Miscellaneous Provisions) Act 1965 (NSW) ss 8, 9 Local Government Act 1993 (NSW) s 625 Local Government Act 1995 (WA) s 6.14 Trade Practices Act 1974 (Cth) s 52(1) Trustee Act 1925 (NSW) ss 14A, 14C Trustees Act 1962 (WA) Pt III, ss 18(1)(a) Bankrupty Code (USA) Ch 11
Cases cited:		Ackers v Austcorp International Ltd [2009] FCA 432 referred to ACQ Pty Ltd v Cook (2008) 72 NSWLR 318 doubted Adeels Palace Pty Ltd v Moubarak (2009) 239 CLR 420 applied Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (in liq) (2000) 202 CLR 588 applied Astley v Austrust Ltd (1999) 197 CLR 1 applied Austin v Austin (1906) 3 CLR 516 applied Australian Iron & Steel Ltd v Greenwood (1962) 107 CLR 308 referred to Australian Securities and Investments Commission v Hellicar (2012) 286 ALR 501 applied Australian Softwood Forests Pty Ltd v Attorney General (NSW) Ex Rel Corporate Affairs Commission (1981) 148 CLR 121 considered Banque Commerciale SA (in Liq) v Akhil Holdings Ltd (1990) 169 CLR 279 applied Beneficial Finance Corp Ltd v Karavas (1991) 23 NSWLR 256 applied Birtchnell v Equity Trustees, Executors & Agency Co Ltd (1929) 42 CLR 384 applied Blackmagic Design Pty Ltd v Overliese (2011) 191 FCR 1 referred to Blair v Curran (1939) 62 CLR 464 applied Bonnington Castings Ltd v Wardlaw [1956] AC 613 referred to BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 applied British Westinghouse Electric and Manufacturing Company of London Ltd v Underground Electric Railways Company of London Ltd [1912] AC 673 applied Burns v MAN Automotive (Aust) Pty Ltd (1986) 161 CLR 653 applied Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 applied Canson Enterprises Ltd v Boughton & Co [1991] 3 SCR 534 applied Cassi di Risparmio della Repubblica di San Marino SpA v Barclays Bank Ltd [2011] 1 CLC 701 referred to Chappell v Hart (1998) 195 CLR 23 referred to Commissioner of Taxation v Firth (2002) 120 FCR 450 applied Commissioner of Taxation v Radilo Enterprises Pty Ltd (1997) 72 FCR 300 applied Commonwealth Bank of Australia v Mehta (1991) 23 NSWLR 84 applied Commonwealth Bank of Australia v Smith (1991) 42 FCR 390 applied Construction, Forestry, Mining and Energy Union v Australian Building and Construction Commission [2012] FCAFC 44 applied Cordelia Holdings Pty Ltd v Newkey Investments Pty Ltd [2004] FCAFC 48 considered Cornish v Midland Bank Ltd [1985] 3 All ER 513 applied Daly v Sydney Stock Exchange Ltd (1986) 160 CLR 371 applied Daniels v Anderson (1995) 37 NSWLR 428 applied Dartberg Pty Ltd v Wealthcare Financial Planning Pty Ltd (2007) 164 FCR 450 referred to Dobler v Halverson (2007) 70 NSWLR 151 applied Doyle v Olby (Ironmongers) Ltd [1969] 2 QB 158 applied Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89 applied Ferneyhough v Westpac Banking Corp [1991] FCA 709 applied Fouche v Superannuation Fund Board (1952) 88 CLR 609 applied Furs Ltd v Tomkies (1936) 54 CLR 583 applied Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1 applied Gluckstein v Barnes [1900] AC 240 referred to Goold v Commonwealth (1993) 42 FCR 51 applied Gould v Vaggelas (1985) 157 CLR 215 applied Government Employees Superannuation Board v Martin (1997) 19 WAR 224 applied Gray v New Augarita Porcupine Mines Ltd [1952] 3 DLR 1 applied Gull v Saunders & Stuart (1913) 17 CLR 82 applied Hadley v Baxendale (1854) 9 Exch 341 referred to Hawkins v Bank of China (1992) 26 NSWLR 562 applied Henderson v Amadio (1995) 62 FCR 1 applied Henville v Walker (2001) 206 CLR 459 referred to Hospital Products Ltd v United States Surgical Corp (1984) 156 CLR 41 applied HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd 217 CLR 640 applied IFE Fund SA v Goldman Sachs International [2007] 2 CLC 134 distinguished In re Coomber; Coomber v Coomber [1911] 1 Ch 723 applied In re Lehman Bros Holdings Inc 422 BR 407 (2010) referred to In re Whiteley (1886) 33 Ch D 347 referred to John Alexander’s Clubs Pty Ltd v White City Tennis Club Ltd (2010) 241 CLR 1 applied Jones v Dunkel (1959) 101 CLR 298 applied Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413 applied Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281 applied Kocsardi v Elegant Tiles Pty Ltd [1996] FCA 1014 referred to Maguire v Makaronis (1997) 188 CLR 449 applied Mathew v Blackmore (1857) 1 H&N 762 applied McCullagh v Lane Fox & Partners Ltd [1996] 10 PNLR 205 distinguished McDonald v Deputy Federal Commissioner of Land Tax (NSW) (1915) 20 CLR 231 applied McKenzie v McDonald [1927] VLR 134 applied Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd (2010) 241 CLR 357 applied Mills v Stanway Coaches Ltd [1940] 2 KB 334 referred to MMAL Rentals Pty Ltd v Bruning (2004) 63 NSWLR 167 applied Monaghan Surveyors Pty Ltd v Stratford Glen-Avon Pty Ltd [2012] NSWCA 94 referred to Nocton v Lord Ashburton [1914] AC 932 applied Nominal Defendant v Meakes (2012) 60 MVR 380 referred to Norman v National Australia Bank Ltd (2009) 180 FCR 243 applied North East Equity Pty Ltd v Proud Nominees Pty Ltd (2012) 285 ALR 217 applied Parker, In the matter of Purcom No 34 Pty Ltd (In Liq) (No 2) [2010] FCA 624 applied Perpetual Trustee Co Ltd v BNY Corporate Services Ltd [2012] 1 AC 383 considered Perpetual Trustee Co Ltd v BNY Corporate Trustee Services Ltd [2010] 2 BCLC 237 referred to Perpetual Trustee Co Ltd v Milanex Pty Ltd (In Liq) [2011] NSWCA 367 referred to Phillips v Brewin Dolphin Bell Lawrie Ltd [2001] 1 WLR 143 referred to Pilmer v Duke Group Ltd (In liq) (2001) 207 CLR 165 applied Podrebersek v Australian Iron & Steel Pty Ltd (1985) 59 ALR 529 applied Potts v Miller (1940) 64 CLR 282 considered Potts v Westpac Banking Corporation [1993] 1 Qd R 135 considered Re Opus Prime Stockbroking Ltd (2008) 171 FCR 473 applied Roads and Traffic Authority (NSW) v Refrigerated Roadways Pty Ltd (2009) 77 NSWLR 360 referred to Robinson v Harman (1848) 1 Exch 850 applied Rogers v Whitaker (1992) 175 CLR 479 referred to Shrimp v Landmark Operations Pty Ltd (2007) 163 FCR 510 referred to Smith New Court Securities Ltd v Scrimgeour Vickers (Asset Management) Ltd [1997] AC 254 applied Smith v Zhang (2012) 60 MVR 525 referred to St George Bank Ltd v Quinerts (2009) 25 VR 666 referred to Strong v Woolworths Ltd (t/a Big W) (2012) 285 ALR 420 applied Sydney South West Area Health Service v MD (2009) 260 ALR 702 applied Tate v Williamson (1866) LR 2 Ch App 55 applied Tepko Pty Ltd v Water Board (2001) 206 CLR 1 applied The King v New Queensland Copper Co Ltd (1917) 23 CLR 495 applied The “Putbus” [1969] P 136 referred to Thornton v Shoe Lane Parking Ltd [1970] 2 QB 163 referred to Trompp v Liddle (1941) 41 SR (NSW) 108 applied Trustees of the Property of Cummins (A Bankrupt) v Cummins (2006) 227 CLR 278 applied Twycross v Grant (1877) 2 CPD 469 applied Vale v Sutherland (2009) 237 CLR 638 applied Walker Corporation Pty Ltd v Sydney Harbour Foreshore Authority (2008) 233 CLR 259 applied Warman International Ltd v Dwyer (1995) 182 CLR 544 referred to Watson v Foxman (1995) 49 NSWLR 315 applied Wong v Silkfield Pty Ltd (1999) 199 CLR 255 applied Youyang Pty Ltd v Minter Ellison Morris Fletcher (2003) 212 CLR 484 applied Zhu v Treasurer of the State of New South Wales (2004) 218 CLR 530 applied References: JD Heydon and MJ Leeming: Jacobs’ Law of Trusts (7^th ed), LexisNexis Butterworths Australia, 2006 PA Keane: The 2009 WA Lee Lecture in Equity: The Conscience of Equity (2009) 84 ALJ 92
Dates of hearing:	2-3, 7-10, 14-18, 21, 24-25, 28-31 March 2011; 30-31 May 2011; 1-3, 6-7 June 2011; 1 December 2011; 3 February 2012; 20 August 2012
Date of last submissions:	10 September 2012
Place:	Sydney
Division:	GENERAL DIVISION
Category:	Catchwords
Number of paragraphs:	1247
Counsel for the Applicants:	Mr AJ Meagher SC with Mr L Armstrong and Mr D Sulan (2 March 2011-7 June 2011) Mr N Hutley SC with Mr D Sulan (1 December 2011 and 3 February 2012) Mr D Sulan (20 August 2012)
Solicitor for the Applicants:	Piper Alderman
Counsel for the Respondent:	Mr J Sheahan SC with Mr S Nixon, Mr J Hutton and Mr S Fitzpatrick
Solicitor for the Respondent:	Ashurst Australia

IN THE FEDERAL COURT OF AUSTRALIA
NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION	NSD 2492 of 2007

JUDGE:	RARES J
DATE OF ORDER:	21 September 2012
WHERE MADE:	SYDNEY

JUDGE:	RARES J
DATE:	21 september 2012
PLACE:	SYDNEY

1........ . Introduction........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[1]
2........ . The Councils’ claims........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[10]
3........ . SCDOS - General........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[29]
3.1...... Grange’s expert credentials........ ........ ........ ........ ........ ........ ........ ........ ....	[30]
3.2...... A brief overview of SCDOs traded by Grange in 2002-2007........ .......	[34]
3.3...... The nature of the Claim SCDOs........ ........ ........ ........ ........ ........ ........ ....	[39]
3.4...... The types of Claim SCDOs........ ........ ........ ........ ........ ........ ........ ........ ....	[52]
3.5...... Relevant risks of the Claim SCDOs........ ........ ........ ........ ........ ........ .......	[62]
3.5.1... Market implied risks........ ........ ........ ........ ........ ........ ........ ........ ...	[65]
3.5.2... The risk in respect of the amount of any loss........ ........ ........ .....	[80]
3.5.3... The risk of market price volatility........ ........ ........ ........ ........ ......	[85]
3.5.4... Liquidity risks........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[103]
3.6...... The risks identified by the arrangers or issuers........ ........ ........ ........ .....	[114]
3.7...... Risks identified in other contemporaneous documents........ ........ ........ .	[126]

4........ . Grange’s relationships with Swan, Parkes and Wingecarribee........ ........ ..	[142]
4.1.1... Grange, its competitors and local government councils........ ....	[146]
4.1.2... Grange’s personnel........ ........ ........ ........ ........ ........ ........ ........ .....	[148]
4.1.3... Grange’s business........ ........ ........ ........ ........ ........ ........ ........ .......	[154]
4.2...... The initial relationship between Swan and Grange........ ........ ........ .......	[155]
4.2.1... Swan’s personnel and its investment policy before 2003........ ..	[155]
4.2.2... Swan’s contact with Grange before the 2003 Swan Policy.......	[167]
4.2.3... The 2003 Swan Policy........ ........ ........ ........ ........ ........ ........ .......	[175]
4.2.4... Swan’s first investment with Grange – the Forum AAA SCDO	[178]
4.2.5... Swan’s next investment: Argyle AAA SCDO........ ........ ........ ..	[209]
4.2.6... Grange’s appreciation of Swan’s lack of financial sophistication........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[218]
4.2.7... Grange’s pattern of dealing with Swan from late 2003........ .....	[229]
4.2.8... Swan’s dealings in 2005 with SCDOs........ ........ ........ ........ .......	[244]
4.2.9... Grange’s “no haircut repos”........ ........ ........ ........ ........ ........ .......	[264]
4.2.10. Grange’s next dealings with Swan........ ........ ........ ........ ........ .....	[269]
4.2.11. Mr Senathirajah is succeeded by Mr Downing........ ........ ........ ..	[274]
4.2.12. Mr Downing’s first transaction with Grange........ ........ ........ .....	[285]
4.2.13. Grange’s 6 June 2006 IMP proposal for Swan........ ........ ........ ..	[292]
4.2.14. Why was Grange proposing switches?........ ........ ........ ........ .......	[293]
4.2.15. Swan’s transactions in 2006 after June........ ........ ........ ........ ......	[308]
4.3...... 2007: Swan enters into an IMP agreement with Grange........ ........ ......	[355]
4.3.1... The Swan IMP agreement........ ........ ........ ........ ........ ........ ........ ..	[357]
4.3.2... Grange’s dealings under the Swan IMP agreement........ ........ ...	[363]
4.3.3... Mr Cameron succeeds Mr Downing in May 2007........ ........ .....	[377]
4.3.4... Events after 2007 involving Swan........ ........ ........ ........ ........ .....	[394]
4.3.5... Other factors going to causation of Swan’s investment decisions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[396]
4.3.6... Causation........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[406]
4.4...... The relationship between Parkes and Grange........ ........ ........ ........ ........	[411]
4.4.1... Parkes’ personnel and investment policy before 2002........ .......	[411]
4.4.2... Parkes’ initial dealings with Grange........ ........ ........ ........ ........ ..	[430]
4.4.3... Parkes’ first SCDO investment with Grange – the Forum AAA SCDO........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[439]
4.4.4... Parkes’ later dealings with Grange in 2003........ ........ ........ .......	[463]
4.4.5... Parkes’ HY-FI transaction........ ........ ........ ........ ........ ........ ........ ..	[481]
4.4.6... Parkes’ later dealings in 2003........ ........ ........ ........ ........ ........ ....	[496]
4.4.7... Parkes’ dealings in 2004-2005........ ........ ........ ........ ........ ........ ...	[501]
4.4.8... Parkes begins developing an investment policy........ ........ ........ .	[553]
4.4.9... Parkes dealings with Grange in 2006-2007........ ........ ........ .......	[565]
4.4.10. Parkes’ 2008 Esperance Combo Notes purchase........ ........ .......	[601]
4.5...... The relationship between Wingecarribee and Grange........ ........ ........ ...	[607]
4.5.1... Wingecarribee’s personnel and its investment policy in 2006...	[607]
4.5.2... Wingecarribee seeks to appoint an investment adviser........ ......	[614]
4.5.3... Wingecarribee enters into the Wingecarribee IMP agreement with Grange........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[637]
4.5.4... Wingecarribee’s and Grange’s early dealings under the IMP agreement........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[645]
4.5.5... The repos of 12 February 2007 and the meeting of 16 February 2007........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[653]
4.5.6... Wingecarribee’s finance committee meeting of 21 February 2007........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[679]
4.5.7... Wingecarribee’s dealings with Grange to mid July 2007........ ..	[689]
4.5.8... Wingecarribee’s decision to sell the Federation Claim SCDO..	[695]
5........ . The legal character of the relationships between the Councils and Grange........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[719]
5.1...... The relationships between Swan and Grange........ ........ ........ ........ ........	[721]
5.1.1... The pre-IMP agreement contractual relationship between Swan and Grange........ ........ ........ ........ ........ ........ ........ ........ .......	[721]
5.1.2... Did Grange owe fiduciary obligations to Swan before 9 February 2007?........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[732]
5.1.3... What representations were made to Swan?........ ........ ........ ........	[750]
5.1.4... Terms and representations not made out........ ........ ........ ........ ....	[760]
5.1.5... The Swan IMP relationship........ ........ ........ ........ ........ ........ ........	[768]
5.1.6... What was Grange’s duty of care to Swan?........ ........ ........ ........	[784]
5.2...... The legal consequences of the relationship between Parkes and Grange........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[791]
5.2.1... The contractual relationship between Parkes and Grange........ .	[791]
5.2.2... Did Grange owe fiduciary obligations to Parkes?........ ........ ......	[795]
5.2.3... What representations were made to Parkes?........ ........ ........ ......	[796]
5.2.4... What was Grange’s duty of care to Parkes?........ ........ ........ .......	[807]
5.3...... The legal consequences of the relationship between Wingecarribee and Grange........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .....	[808]
5.3.1... The Wingecarribee IMP relationship........ ........ ........ ........ ........ .	[809]
5.3.2... What representations were made to Wingecarribee?........ ........ .	[814]
5.3.3... What was Grange’s duty of care to Wingecarribee?........ ........ ..	[819]
6........ . Did Grange breach any obligation, duty or statute?........ ........ ........ ........ ....	[820]
6.1...... The Dante notes problem........ ........ ........ ........ ........ ........ ........ ........ .......	[822]
6.1.1... The Dante notes in general........ ........ ........ ........ ........ ........ ........ .	[823]
6.1.2... The relevant terms of the Dante notes........ ........ ........ ........ ........	[825]
6.1.3... The English and United States judgments........ ........ ........ ........ .	[829]
6.1.4... Other developments relating to the Dante notes........ ........ ........	[833]
6.1.5... The position in respect of the collateral for the Dante Notes.....	[838]
6.2...... Contractual breaches........ ........ ........ ........ ........ ........ ........ ........ ........ ......	[842]
6.2.1... The pre-Swan IMP agreement and Parkes contractual breaches by Grange........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[843]
6.2.2... Did the product have a high level of security for protection of the capital invested by the Council?........ ........ ........ ........ ........ ...	[845]
6.2.3... Were the Claim SCDOs easily tradeable on an established secondary market?........ ........ ........ ........ ........ ........ ........ ........ ......	[864]
6.2.4... Were the Claim SCDOs readily able to be liquidated for cash at short notice?........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[883]
6.2.5... Were the products suitable and appropriate for a risk averse local government council?........ ........ ........ ........ ........ ........ ........ .	[887]
6.2.6... Did the Claim SCDOs have secure income streams?........ ........	[896]
6.2.7... Did Grange exercise reasonable skill and care in making each investment recommendation and giving that investment advice to Swan (before the IMP agreement) and Parkes?........ ........ .....	[899]
6.2.8... Did Grange breach the Swan IMP agreement?........ ........ ........ ..	[904]
6.2.9... Did Grange breach the Wingecarribee IMP agreement?........ ...	[920]
6.2.10. Conclusions on contractual issues........ ........ ........ ........ ........ ......	[931]
6.3...... Was there a breach of fiduciary obligation by Grange?........ ........ ........	[932]
6.3.1... Did Grange commit a breach of its fiduciary obligations owed to Swan before 9 February 2007?........ ........ ........ ........ ........ ......	[932]
6.3.2... Did Grange commit a breach of its fiduciary duty owed to Parkes?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[942]
6.3.3... Did Grange commit a breach of its fiduciary duty owed to each of Swan and Wingecarribee in respect of their IMP agreements?........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[943]
6.4...... Were the representations made by Grange misleading or deceptive?...	[947]
6.4.1... The legislative context........ ........ ........ ........ ........ ........ ........ .......	[947]
6.4.2... Were representations (1)(a) and (2) misleading or deceptive?..	[955]
6.4.3... Were representations (1)(b) and (3)(g) misleading or deceptive?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[961]
6.4.4... Were representations (3)(a), (b) and (c) misleading or deceptive?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[969]
6.4.5... Were representations (3)(d), (e), (f) and (4) misleading or deceptive?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[977]
6.5...... Did Grange breach its duty of care?........ ........ ........ ........ ........ ........ ......	[979]
6.6...... Grange’s claim for indemnity under the IMP agreements........ ........ .....	[980]
7........ . Damages........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[982]
7.1...... The issues as to value of the Councils’ existing holdings of the Claim SCDOs........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[982]
7.1.1... The appropriate measure of damages - principles........ ........ ......	[984]
7.1.2... How the damages should be assessed........ ........ ........ ........ ........	[996]
7.2...... Valuations of the Claim SCDOs........ ........ ........ ........ ........ ........ ........ ....	[1007]
7.2.1... Swan’s and Parkes’ sales of the Kalgoorlie, Esperance and Blaxland Claim SCDOs........ ........ ........ ........ ........ ........ ........ .....	[1007]
7.2.2... The issues between the valuers........ ........ ........ ........ ........ ........ ..	[1014]
7.2.3... The use of bids in valuation........ ........ ........ ........ ........ ........ .......	[1019]
7.2.4... The valuation of the remaining non Dante notes........ ........ .......	[1026]
7.2.5... The valuation of the Dante notes........ ........ ........ ........ ........ .......	[1053]
7.3...... Other issues on valuation........ ........ ........ ........ ........ ........ ........ ........ .......	[1074]
7.3.1... The restructure SCDOs non-issue........ ........ ........ ........ ........ ......	[1074]
7.3.2... The valuation issue in Grange’s liquidation........ ........ ........ .......	[1075]
8........ . Grange’s defences........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[1078]
8.1...... The issues Grange raised as defences........ ........ ........ ........ ........ ........ ....	[1078]
8.1.1... Proportionate liability – principles........ ........ ........ ........ ........ .....	[1082]
8.2...... Concurrent wrongdoers........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[1085]
8.2.1... Grange’s claims that the ratings agencies were concurrent wrongdoers........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .	[1085]
8.2.2... Were the ratings agencies concurrent wrongdoers?........ ........ ...	[1091]
8.2.3... Grange’s claim that Lehman Asia was a concurrent wrongdoer	[1103]
8.2.4... Did Grange act in accordance with peer professional opinion?.	[1108]
8.3...... Contributory negligence........ ........ ........ ........ ........ ........ ........ ........ ........ .	[1118]
8.3.1... The legislative schemes........ ........ ........ ........ ........ ........ ........ ......	[1118]
8.3.2... Principles applicable to contributory negligence........ ........ .......	[1123]
8.3.3... Was Swan contributorily negligent?........ ........ ........ ........ ........ ..	[1132]
8.3.4... Was Parkes contributorily negligent?........ ........ ........ ........ ........	[1143]
8.3.5... Was Wingecarribee contributorily negligent?........ ........ ........ ...	[1172]
9........ . Are the typical Claim SCDOs “derivatives” within the Corporations Act 2001........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[1176]
9.1...... The “derivatives” issue........ ........ ........ ........ ........ ........ ........ ........ ........ ..	[1176]
9.1.1... The general nature of the issue........ ........ ........ ........ ........ ........ ...	[1176]
9.1.2... The legislative scheme........ ........ ........ ........ ........ ........ ........ .......	[1177]
9.1.3... The relevant features of the transaction documentation for the Blaxland Claim SCDO........ ........ ........ ........ ........ ........ ........ .......	[1180]
9.2...... The parties’ submissions........ ........ ........ ........ ........ ........ ........ ........ ........	[1186]
9.2.1... The parties’ arguments – debentures........ ........ ........ ........ ........ ..	[1186]
9.2.2... The parties’ arguments – managed investment scheme........ .....	[1189]
9.3...... Consideration – Were the typical Claim SCDOs derivatives contracts?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ .......	[1194]
9.3.1... Consideration – Were the typical Claim SCDOs debentures?...	[1194]
9.3.2... Consideration – Were the typical Claim SCDOs a managed investment scheme?........ ........ ........ ........ ........ ........ ........ ........ ...	[1206]
9.3.3... Consideration – derivatives........ ........ ........ ........ ........ ........ ........	[1214]
10....... Common questions........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ...	[1215]
10.1.... The common questions identified?........ ........ ........ ........ ........ ........ ........	[1215]
10.1.1. The role of common questions........ ........ ........ ........ ........ ........ ...	[1215]
10.1.2. The common questions posed by the Councils........ ........ ........ ..	[1219]
10.2.... Common questions – consideration........ ........ ........ ........ ........ ........ .......	[1221]
10.2.1. Question (1): The features of the Claim SCDOs........ ........ ......	[1221]
10.2.2. Question (2): Were the Claim SCDOs consistent with conservative investment strategies or investment requirements in legislation affecting local government bodies or trustees?....	[1224]
10.2.3. Question (3): What was Grange’s obligation or duty to exercise reasonable skill and care and did it breach that obligation or duty?........ ........ ........ ........ ........ ........ ........ ........ .....	[1226]
10.2.4. Question (4): Did Grange engage in conduct that was misleading or deceptive?........ ........ ........ ........ ........ ........ ........ ....	[1232]
10.2.5. Question (5): What contracts were made between Grange and its non IMP claimants, what, if any, fiduciary obligations did Grange owe and what, if any, breaches were there of either?....	[1235]
10.2.6. Question (6): What rights did the Western Australian IMP agreement claimants have?........ ........ ........ ........ ........ ........ ........	[1241]
10.2.7. Question (7): What rights did the New South Wales IMP agreement claimants have?........ ........ ........ ........ ........ ........ ........	[1242]
10.2.8. Question (8): What are the correct principles for measuring damages?........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ....	[1244]
11....... Conclusion........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........ ........	[1245]