In a long (1,247 paragraphs long) judgment, the Federal Court of Australia has found Lehman Brothers liable to a class of three municipal councils arising from the sale of synthetic collateralised debt obligations (SCDOs), an investment product that Rares J described as essentially ‘a sophisticated bet’ – and a bet that went disastrously wrong during the financial crisis of 2007.

Grange Securities (later acquired by Lehman) marketed the SCDOs as being like government bonds, readily tradable in a liquid and established market, and suitable for a conservative investment strategy. The risk that the councils would lose their investment was said to be remote. All of this proved to be anything but true. Grange breached its contract with the councils, negligently misrepresented the level of risk involved, engaged in deceptive and misleading conduct under Australian securities law and breached its fiduciary duties as adviser. There was damning evidence in an internal e-mail that Grange not only knew that the SCDOs were ‘risky, illiquid, and, if sold, might realise far less than their face value’, but also that Grange ‘was conscious that the trust its uninformed Council clients had placed in it was being used to Grange’s advantage’. Lehman (or rather its trustees in bankruptcy) will have to make good the multi-million-dollar investment losses of each of the councils.  

Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq), [2012] FCA 1028  

[Link available here].