The Federal Court of Australia recently delivered judgment in Wingecarribee Shire Council v Lehman Brothers Australia Ltd (In Liq) [2012] FCA 1028, a case in which three Shire Councils sued Lehman Brothers Australia Ltd (In Liq) (Lehman Brothers) for damages caused by loss-making financial products sold to the plaintiffs by Grange Securities Limited (Grange), a company that was subsequently bought out and rebadged as Lehman Brothers.

The decision provides a salient, and somewhat sobering, reminder of the dim view that Courts take when risks are taken with money belonging to another.


A number of Shire Councils brought proceedings against Lehman Brothers, in connection with loss suffered as a result of purchasing a variety of highly complex financial products, including products known as ‘synthetic collateralised debt obligations’ (SCDOs).

Prior to their foray into the investment world of SCDOs, the plaintiffs had all adhered to conservative investment strategies in the past.  Up to that time, the plaintiffs’ respective officers had only ever dealt with a limited range of financial products, none of which involved financial transactions that were of the complexity of SCDO products.  

Despite knowing that the plaintiffs were determined to only pursue conservative investment strategies, Grange approached the plaintiffs with the offer of selling them SCDO products.  Grange marketed the SCDOs in such a way that the plaintiffs were led to believe that:

  • SCDOs were an exceptionally secure investment product; and
  • SCDOs provided a higher rate of return than was to be expected from the types of investments normally made by the plaintiffs.

With the plaintiffs each having substantial surplus funds at their disposal, and with Grange having told each of them that the SCDOs were effectively as secure, and as liquid, as bank or government debt, the plaintiffs purchased the first of what turned out to be a large number of SCDO products traded back and forth with Grange in the few years following.  This ultimately led on to Grange entering into ‘Individual Managed Portfolio’ agreements (IMP) with two of the three plaintiffs.

The global financial crisis arrived; the market tumbled; and the plaintiffs’ investments turned sour, with the three plaintiffs claiming many millions of dollars of losses between them.


Rares J found that the SCDOs were basically a ‘sophisticated bet’, the security of which was far from what would be expected of the ‘prudent, capital protective investments’ that were portrayed by Grange.  In this regard, His Honour found that the SCDOs were highly susceptible to widespread or extreme market events, making theman extremely risky investment when compared to similarly rated products.

Accordingly, his Honour went on to conclude that Grange:

  • had engaged in misleading and deceptive conduct with respect to the marketing of the SCDOs;
  • was negligent in recommending that the plaintiffs purchase the products;
  • was negligent in using public money to invest in the SCDOs; and
  • had breached each of the IMPs to which it was a party.