SYDNEY, NEW YORK and OTTAWA, July 30, 2013 /PRNewswire/ -- Law firm Corrs Chambers Westgarth has cautioned credit rating agencies, investment banks and investment managers to tread carefully when promoting financial products.
For the first time, rating agencies could be liable for money lost by investors in financial products they rated, despite the absence of a contractual relationship.
Corrs partner, Rommel Harding-Farrenberg, said the warning followed a landmark ruling in Australia that had implications for the US, the UK and globally.
"This new and significant development follows a recent case where the court found rating agencies, investment managers and others can owe a duty of care to investors," Mr Harding-Farrenberg said.
"If a financial product has been inappropriately rated or marketed, the rating agency, originator and investment manager could be held accountable. On one hand, this is a good result for investors. On the other, it should spark major changes in the due diligence and analysis process undertaken by rating agencies and other involved parties."
The Australian Federal Court found international credit rating agency Standard & Poor's engaged in misleading and deceptive conduct when it gave a top AAA rating to CPDOs - a highly leveraged financial product marketed as Rembrandt notes.
The court found that Standard & Poor's based the prestigious AAA rating solely on information provided by the creators of the product, ABN AMRO. Following large-scale investment, the value of Rembrandt notes went into freefall, leaving investors in the lurch.
"As a result of the AAA rating, 13 councils in NSW invested A$16 million in Rembrandt notes through an investment manager which itself had purchased $45m worth of the notes," Mr Harding-Farrenberg said.
The councils brought successful claims against Standard & Poor's as well as ABN AMRO and the investment manager.
"This decision could have major global implications in relation to litigation pending against rating agencies in the US and elsewhere. The court will not impute responsibility simply because an investor has suffered losses. However, if there is evidence there was no reasonable basis for a rating, or where a rating analysis is not a result of an exercise of reasonable care, then rating agencies, developers and marketers of financial products may be vulnerable," Mr Harding-Farrenberg said.
For more information please contact:
Natasha Stevenson,
Phone: +61 7 3228 9307,
Email: natasha.stevenson@corrs.com.au
