First it was the United States Government – now rating agency Standard & Poor’s is facing the wrath of Moree Plains Council.
Litigation fund IMF yesterday announced that it was stumping up the cash for a lawsuit against McGraw-Hill Companies – which owns S&P – brought by around 90 Australian local councils, churches and charities.
The case relates to ratings S&P placed on credit default options (CDOs), synthetic debt instruments made infamous during the global financial crisis.
S&P says the claim is baseless and will be vigorously defended.
IMF executive director John Walker told Business Insider that the case relied on the model used by S&P to calculate the triple-A rating placed on the CDOs, which he said was flawed.
There was “no basis” for the rating, which should mean there is a miniscule chance of losing money on an investment with a triple-A label.
“Inputs into the model were inappropriate,” he said.
After seeking the advice of an undisclosed independent expert, Walker said that the ‘Gaussian Model’, a hyper-complex bell curve that S&P used to calculate its ratings on the CDOs, didn’t properly take into account the correlation between different companies.
This link was eventually revealed by the domino-effect of the financial crisis.
IMF is feeling confident. In a case it also backed last year, S&P along with ABN AMRO and Local Government Financial Services were successfully sued for losses suffered by 12 Australian local councils, after they invested in constant proportion debt obligations (CPDOs).
There were way more CDOs sold during the financial crisis than CPDOs, and the judgement in November last year was described as a landmark decision with implications for other cases in which investors blame the people who rated the products they lost money on.
In an emailed statement, S&P said: “The lawsuit is without merit and we will vigorously defend ourselves against it. Our ratings were based on the good faith judgement of our analysts and reflect what they knew at the time.”
Earlier this year the United States Government said it was bringing a $5 billion lawsuit against S&P for defrauding investors.
It accused it of inflating its ratings to secure more business from the investment banks who issued the products.
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