In a landmark decision, the Full Court of the Federal Court has upheld a 2012 finding that Standard & Poor’s was negligent and engaged in misleading and deceptive conduct in giving a financial product a AAA rating.

For rating agencies, and creators of financial products, the decision confirms they can owe a duty of care to investors and raises the bar on due diligence behind ratings decisions.

In 2006 ABN AMRO created a complex financial product known as the “CPDO” (but marketed as “Rembrandt” notes). S&P gave the CPDO a AAA rating, but did so only on the basis of information provided by ABN AMRO.

ABN AMRO then (with S&P’s permission) published the AAA rating in its marketing material. While some potential investors questioned why certain risks were not considered in S&P’s model, ABN AMRO did not pass this concern on to S&P. S&P did eventually become aware of the concerns, but chose not to modify the model out of fear it would have an unpredictable effect on the rating.

Thirteen local councils in NSW invested A$19 million in Rembrandt notes through financial adviser, the Local Government Financial Services (LGFS), which had itself purchased A$26 million of the notes.

Then the financial crisis hit and the value of Rembrandt notes plunged. By the time the councils were automatically cashed out in late 2008 the value of their notes was around one-tenth of what it had been.


The councils brought proceedings against LGFS (as the agent that facilitated the purchase), ABN AMRO (the creator of the financial products) and S&P (as the agency that rated the financial products AAA).

The court determined S&P was negligent in giving the notes the AAA rating and that it had engaged in misleading and deceptive conduct when it calculated and disseminated the rating.

S&P owed a duty of care to potential investors and was negligent in rating the financial products when loss was reasonably foreseeable (and S&P was aware that the AAA rating was used to induce the investors to invest).

The court also found ABN AMRO and LGFS to be liable for investors’ losses.


S&P actually admitted the AAA rating was flawed in its appeal, but argued that it owed no duty of care to investors because the key elements required to establish a duty of care were not present. Specifically:

(a) S&P did not know the identity of the investors and thus any liability was indeterminate

The Court rejected this on the basis that while the particular identity of potential investors may not have be known, S&P knew the investors existed and authorised distribution of the rating to them. S&P also knew the rating would be highly material to the decision of potential investors to invest.

(b) The investors were not ‘vulnerable’ and should have made their own inquiries

Rejecting this assertion, the court found that, rather than being a separate element, vulnerability was a consequence of an investor reasonably relying on S&P’s rating, and that neither LGFS nor the councils were in a position to “second-guess” S&P’s AAA rating.

(c)  No duty arose because there was no contractual or fiduciary relationship between S&P and the investors (being LGFS and the councils). S&P’s agreement was with ABN AMRO for the purposes of producing the rating.

The court found that the mere absence of a contract did not preclude the existence of a duty of care. The fact the contract between ABN AMRO and S&P anticipated the rating being provided to third parties, suggested S&P was at least aware of the rating being relied upon by persons other than ABN AMRO.


S&P argued its disclaimers made it clear that it would not be liable for any loss suffered if its rating was relied upon in investing in CPDOs.

However, the court found that S&P’s disclaimer in its Pre-Sale Report did not apply to the representation necessarily conveyed by S&P’s rating – i.e. that S&P had reasonable grounds for the rating and exercised reasonable care in producing it.

The disclaimers in S&P’s Ratings Letters (which stated that its rating is not “investment, financial or other advice” and cannot be relied upon as such) also did not apply to the rating, because the rating was not advice. It was an expert opinion as to the creditworthiness of the CPDOs.

As to what duty of care S&P owed the investors, the court did not mince words:

  1. a rating agency must exercise reasonable care in forming the opinion expressed by a rating; and
  2. a rating agency must have reasonable grounds for that opinion.


The global financial crisis saw billions of dollars wiped off the value of financial products across the world. Does this case then open the door to investor actions for other poor performing financial products where investors relied on a product rating?

To date, as far as we are aware, no actions have been successfully brought against a rating agency anywhere else in the common law world in relation to ratings it has issued.

A number of actions are pending in the United States, including a US$5 billion claim brought by the U.S. Department of Justice against S&P (which alleges S&P misrepresented credit ratings during the financial crisis), but these actions have not reached a final outcome.

While the result in Bathurst may give rise to an increase in the number of claims filed, it seems unlikely that a duty of care as clear as that demonstrated in Bathurst would be readily found again.

Nevertheless, where the circumstances of an investor’s loss bear similarities to the facts of Bathurst, the prospect of a successful court action against a rating agency for its rating of a financial product (at least in Australia) has markedly improved.

For rating agencies, the upholding of the first instance decision carries a strong message: ensure ratings are backed by best practice due diligence processes. Evidence of the veracity of a rating should be recorded and stored in order to defend a claim, should one ever arise.

In respect of disclaimers, rating agencies will need to ensure that these are worded very carefully if they seek to disclaim responsibility for the opinion expressed by a rating.

Key takeouts:

  1. A rating agency can owe investors a duty of care (even where there is no contract between the rating agency and investors).
  2. The duty is: exercise reasonable care in formulating, and ensure there is a reasonable basis for issuing, a rating.
  3. Issuing a rating without reasonable basis will constitute a breach of the duty.
  4. A rating agency may be liable for the total loss of the investment.
  5. A rating agency does not need to know the actual identity of investors — knowing the likely class or type of investors can be enough to give rise to liability.