City leads funds recovery action

The council initially purchased collateralised debt obligations (CDOs) from Grange Securities under the misapprehension they were low-risk investments.

However, they took a big hit in 2007 and 2008 as the global financial crisis took hold because of heavy exposure to high-risk US sub-prime mortgages, car loans and credit card debt.

Lehman Brothers Australia assumed liability for the investments when it acquired Grange in January 2007, before its parent became the largest bankruptcy filing in US history just over 18 months later.

In September 2008 the City’s CDO holdings with Lehman Australia totalled more than $9.7 million.

It recovered part of those funds when some of the CDOs matured and took a relatively conservative approach with the remainder when it heavily wrote down their value in 2008 and 2009.

The crystalised losses were understood to be about $3 million.

City acting chief executive Jim Coten said the council had recently recovered about 97.5 cents in the dollar on $1 million worth of CDOs in two funds and was waiting for confirmation it would receive an additional $1.02 cents per dollar on another $500,000 CDO investment.

A landmark Federal Court ruling last September ruled the City and its lead class-action partners Parkes Shire Council and Wingecarribee Shire Council were entitled to compensation from Lehman Brothers Australia.

In making his findings, Justice Steven Rares stated Lehman breached its fiduciary duty to provide sound financial advice in advising the councils on the sales of CDOs.

‘We were one of the lead plaintiffs in the action, which paved the way for damages awards of up to $200 million for the 72 councils and community groups involved in the class action,’ Mr Coten said.

He said in its latest legal action, the City ” as part of the Belmont Group of Litigants ” had been successful ‘in various courts’ in the UK.

‘Without the work of the Belmont Group of Litigants, the funds would have stayed in limbo for many years,’ he said.

‘By reaching agreement, some $220 million is being transferred back into Australian communities.’

Mr Coten said many local governments had already written down the value of their CDOs and would now receive a boost to their budgets.

‘However, the City of Swan has been closely involved in recovering the funds since the collapse of Lehman Brothers, so we had anticipated this recovery and included it in our budgeting process,’ he said.