Landmark decision in Wingecarribee Shire Council v Lehman Brothers Australia Ltd (In Liq) [2012] FCA 1028

The Federal Court has handed down its judgment in the case of Wingecarribee Shire Council v Lehman Brothers Australia (in liq) [2012] FCA 1028. In a judgment by Rares J, it was determined that Grange Securities breached its fiduciary duty and engaged in misleading and deceptive conduct. The decision is likely to have wide-ranging implications in the realm of financial regulation. 

The case is a class action on the part of three councils - Wingecarribee Shire Council, Parkes Shire Council and the City of Swan - who sought damages against the respondent, Lehman Bros Australia Ltd (In Liq) - (previously known as Grange Securities Ltd).  The councils claimed that they suffered losses arising out of their acquisition of synthetic collateralised debt obligations (SCDOs) and some other complex financial products.

SCDOs are complex, high-risk financial products that also offer higher interest rates. Grange used the high ratings of the SCDOs as a selling point to its risk-averse Council clients. The Court found that the SCDOs did not have the characteristics that Grange promised in the individual contracts with the councils. Specifically, 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. As such, Grange was negligent in recommending to and advising Parkes and Swan to make those investments. 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

The Court also found that by using its powers under the Wingecarribee and Swan individual managed portfolio (IMP) agreements to invest in SCDOs, Grange breached its obligations under those agreements. The Court said that it was negligent to use public money in such high-risk endeavours as the SCDOs. Grange also breached the Swan IMP agreement because the SCDOs did not provide that Council with ready access to funds, because of their lack of liquidity.   Similarly, it was determined that Grange breached the Wingecarribee IMP agreement because the SCDOs had no active secondary market and were derivatives.   Finally, the court 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.   The case provides the first definitive answer to an important question: do investment banks owe fiduciary duties, and can these be voided either by contractual terms or legislative exceptions? The Court found Grange was liable to compensate the Councils for their losses incurred as a result of their investments.   The Caselink feature of our LawOne Service has over 70, 000 links to judgments relating to legislative provisions, making it an essential research tool for legal professionals.