S&P Settles Landmark Derivatives-Rating Lawsuit in Australia

By Reuters
August 10, 2018Business News
S&P Settles Landmark Derivatives-Rating Lawsuit in Australia
File Photo: A broker looks at his screens at Frankfurt's stock exchange on September 15, 2008, in the wake of US investment banking giant Lehman Brothers filing for bankruptcy amid the global financial crisis.(Thomas Lohnes/AFP/Getty Images)

SYDNEY—Standard & Poor’s said on Aug. 10 it has settled a lawsuit in Australia over claims by pension funds and local governments that the credit rating firm had overlooked risks when awarding high ratings to opaque investments that imploded in the global financial crisis.

Australia’s Federal Court approved the settlement on Aug. 9, S&P said in an emailed statement which did not disclose the settlement sum or terms.

“S&P Global is pleased to reach a settlement on the class action lawsuit, the last of the significant litigation pertaining to our previous ratings actions on collateralised debt obligations,” it said.

The U.S.-based ratings agency was sued for at least A$190 million ($140 million) by two local governments and two pension funds in Australia, which lost money on synthetic collateralized debt obligations (SCDOs) rated by S&P when the U.S. subprime mortgage crisis hit a decade ago.

Settling the class action suit, funded by Singapore-based Litigation Capital Partners, likely protects S&P from suits from other investors because legal avenues have now lapsed.

A spokesman for the plaintiffs said the settlement was confidential.

Litigation Capital Partners’ Australian representative had no comment on Aug. 9, nor did the councils and pension funds when contacted by Reuters.

During the case, lawyers for the local councils accused S&P of weakening its risk assessment criteria to win business and turn out high ratings on opaque debt products. S&P said it designed and assigned ratings in accordance with well-recognized international practice and Australian regulations.

In the decade since the global financial crisis, S&P has settled lawsuits in the U.S. over its ratings of CDOs, the products blamed for spreading market turmoil around the world.

A finding of wrongdoing against the agency in Australia could have re-opened legal avenues, since lapsed due to the statute of limitations, to pursue S&P over its role in investment losses incurred during the financial crisis.

S&P and other rating agencies have long faced criticism from investors, politicians and regulators for assigning high ratings to securities that quickly turned sour. Criticism specifically focuses on the fact they are paid by issuers for ratings, raising concern about potential conflicts of interest.

The investments that found their way into Australia were designed by U.S. investment banks, transferring risk in those products from Wall Street to local councils that would typically invest their spare cash in bank and government bonds.

By Tom Westbrook

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