I have long complained that the English legal system fails to adequately hold banks to account for misconduct, including mis-selling claims (See my post of 21 August 2012

This complaint applies also to the failure of English law to provide effective remedies to investors who bought complex financial products on the basis of them being given AAA or equivalent status by the rating agencies, only to find that the investments were far from being creditworthy. The banks and the rating agencies have, until now, largely avoided judicial sanction for these claims. However, the tide may be turning.

Wrongly classed

In a hugely important judgment the Australian Federal Court has ruled that S&P and ABN Amro should pay damages to investors who bought ABN Amro products that were wrongly classed as AAA by S&P.
The lengthy judgment of Federal Court Justice Jayne Jagot found that S&P had been misleading and deceptive in its rating of a 2006 issue of CPDOs (Constant Proportion Debt Obligations), the instrument at the heart of the case, and had published information or statements that had been false in material particulars. This amounted to them having made negligent misrepresentations to the class of potential investors in Australia as in affording a AAA rating S&P had represented its opinion was that the capacity of the notes to meet all financial obligations was “extremely strong”, and that this was a representation that S&P had reached based on reasonable grounds and as the result of an exercise of reasonable care, when in reality neither was true and S&P knew this not to be true at the time. ABN Amro was found to be culpable based not only on it being knowingly concerned in S&P’s contraventions, but also because it was found to have engaged in similarly misleading and deceptive conduct.

Investment advice

Aside from the court finding against the institutions, another key point of interest is that the case undermines the suggestions that any views expressed by the rating agencies are only for the benefit of the Issuer involved, and in any event rating agencies merely give opinions rather than investment advice, an argument that has been deployed in an effort to defeat other cases brought to date across Europe and in the US. 
Whilst the case concerned only one, specific financial product, the court’s findings are nevertheless likely to have some resonance with potential claims relating to the rating, sale and purchase of other financial instruments. Accordingly lawyers across Europe and the US will now be carefully studying the judgment to examine whether it presents any opportunities in those jurisdictions for similar actions against the rating agencies nearer to home. Judgments of the Australian Courts are not binding in England or in the US, but they have persuasive value.

Potential claims

S&P is unsurprisingly seeking to appeal the decision but for now at least the judgment brings food for thought to investors, particularly those with potential claims in England who perhaps till now have been concerned about the reception such claims against the rating agencies and banks would receive.  Whilst it is well known that the English courts do not readily accede to general arguments that investors have been missold investments, with limitation periods now likely to be fast approaching parties with identifiable losses that have till now been sitting on the fence will likely have an important decision to make and may now be stirred to take action instead of watching as their potential claims become statute barred.