“Standard & Poor’s misled investors by giving its highest rating to derivative-linked notes that lost almost all their value amid the global credit freeze, an Australian judge ruled, in what plaintiffs say is the first decision of its kind.
The credit ratings company was “misleading and deceptive” in its rating of two structured debt issues in 2006, Federal Court Justice Jayne Jagot said in a summary of her ruling released today in Sydney. The Australian councils that brought the case are entitled to damages from S&P and two other defendants, ABN Amro Bank NV and Local Government Financial Services Pty., according to the ruling.
Twelve Australian townships, suing as a group, claimed they lost A$15 million ($15.5 million) of A$16 million they invested in so-called Rembrandt notes rated AAA by S&P. A 13th township sued separately after losing more than 90 percent of its A$1 million investment.
Securitization enabled by S&P and other ratings companies contributed to more than $2 trillion in losses and writedowns at the world’s largest financial institutions and the collapse of Lehman Brothers Holdings Inc. in 2008, causing credit markets to seize up and leading to a global recession. A report by the U.S. Senate’s Permanent Subcommittee on Investigations said that S&P, Moody’s Investors Service and Fitch Ratings helped trigger the crisis when they cut thousands of mortgage securities they rated AAA to junk status.
The ruling in Sydney is a “major blow to the ratings agencies”