Council ignored by bank
LIQUIDATION: The closed office of Lehman Brothers
Australia A SENIOR NSW council o f f i c e r s a y s Lehman Brothers Australia ignored his instructions, prior to the global financial crisis ( GFC) in 2007, not to invest council funds in high risk products, a court has heard.
Lawyers for the collapsed investment bank yesterday argued that Wingecarribee Shire, in the NSW Southern Highlands, was aware of the risk involved in its inv e s t m e n t s w i t h t h e bank, but went ahead due to the potential for high returns.
In a landmark $ 250 million Federal Court case stemming from the GFC, local councils last week argued they were duped by Lehman Brothers A u s t r a l i a , f o r m e r l y Grange Securities, into thinking they were buying safe investments. A t otal of 72 charities, churches, local councils and private investors a r e s u i n g t h e n o w - d e f u n c t i n v e s t m e n t bank for losses incurred in the collapse of the subprime mortgage market.
T h e l i q u i d a t o r f o r Lehman Brothers is trying to show that individual members of the class action were responsible for their own losses. Wingecarribee Shire, about 1 4 0 kil ometres southwest of Sydney, is suing to recover $ 21.4 million in losses.
The shire’s financial services manager, Douglas Neville, the trial’s first witness, yesterday told the Sydney court that Lehman Brothers ignored his instructions not to invest shire funds i n h i g h - r i s k collateralised debt obligations ( CDOs), which were comprised partly of bonds backed by subprime mortgages.
He said he made it clear to Grange Securities advisers in a face-toface meeting that the council only wanted to invest in ‘‘ floating-rate notes with Australian banks, regulated by the Australian Prudential Regulation Authority’’.
But Barrister John Sheahan SC, acting for t h e l i q u i d a t o r o f Lehman Brothers Australia, argued Mr Neville did not specifically exclude CDOs as an investment product in meetings with Grange.
Mr Sheahan put to Mr Neville that he was primarily concerned with increasing the shire’s level of investment return, and that he must have understood that to gain a higher return would mean investing in higher risk products.
Mr Neville denied the suggestion, saying the c o unci l was t o l d b y Grange Securities that its money would only be invested in floating-rate notes ( FRNs) – low-risk bonds that pay variable interest on a quarterly basis.
Mr Neville said he first became suspicious that Grange had i nvested council funds in CDOs in February 2007, after the name was mentioned in a contract note.
But he did not become fully aware of the investments until July 2007.
The case is set down for four to five weeks.