In Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in Liq) [2012] FCA 1028, the Federal Court of Australia found that Lehman Bros Australia Ltd (In Liq), which was formerly called Grange Securities Ltd (Grange) is liable to compensate the 3 plaintiff Councils (as representatives in a class action for other councils and not-for-profits) for their losses incurred as a result of their investments in synthetic collateralised debt obligations and some other complex financial products (collectively SCDOs) between 2003 and 2008, before the GFC.

Judge Rares concluded that:

1. Grange used the high ratings of the SCDOs as a significant selling point to its risk averse Council clients.

2. Grange put itself forward to Councils as a financial adviser that understood the investment requirements of local government, including relevant legislative and policy constraints.

3. Grange told the Councils when it dealt with them that its SCDO products were a form of floating rate notes. Grange told them that if the SCDOs were held to maturity the Councils would get their money back and that the products’ high credit ratings put them in the same “universe” of investments as debts of the AAA rated Australian Government and AA- rated four major Australian banks.

4. Grange also represented to the Councils that the investments, including SCDOs that it recommended or made on their behalves, were suitable for a conservative investment strategy. It represented that those products were prudent, capital protective investments and that they complied with statutory and Council policy requirements. Grange also represented to the Councils that those products were as liquid as the bank Fixed Rate Note products that the Councils were familiar with, could readily be redeemed for cash and were easily tradeable on an established secondary market. In addition, Grange represented to the Councils that the maturity dates for the SCDOs were suitable to the Councils’ needs.

5. The SCDOs did not have the characteristics that Grange promised they would have in their individual contracts: that is, the SCDOs did not have a high level of security for the invested capital, were not easily tradeable on an established secondary market or able to be readily liquidated for cash and were not suitable investments for risk averse Councils.

6. Grange was negligent in recommending to and advising councils to make those investments.

7. By using its powers under the investment agreements to invest in SCDOs, Grange breached its obligations under those agreements. That was because it was negligent to use public money in investments with the risks that the SCDOs had. In addition, the SCDOs did not provide that Council with ready access to funds, because of their lack of liquidity.

8. Grange engaged in misleading and deceptive conduct in breach of s 12DA of the ASIC Act when it promoted the SCDOs to the Councils as suitable investments.

The reasons for judgment are over over 440 pages long. Further orders will be made.