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6th November 2012

Australian court finds S&P 'not reasonably competent'

Justice Jayne Jagot, an Australian judge referred to Standard & Poor's decision to award AAA ratings to specific 'grotesquely complicated' structured securities as something a 'reasonably competent rating agency could not have done. S&P and ABN AMRO's wholesale banking unit (now part of RBS) were also said to have published information that was either false or that were 'negligent misrepresentations" of the facts.

The judgement refers to purchases of constant proportion debt obligations (CPDOs) made by Australian councils in 2006 from an intermediary, Local Government Financial Services. The councils lost more than 90% of their investments. LGFS was also a party to the suing of S&P and ABN AMRO. S&P say they will appeal the decision and RBS stated only that they were studying the 1500 page judgement.

The size of the claim, even with legal fees added, is small change for S&P and RBS. However the significance is in how many other claims could now emerge and use this judgement as a precedent should it not be successfully appealed. Most attempts to sue the rating agencies in the US have failed to date. This judgement could have some influence within and outside of Australia.