RBS and S&P sued by European investors over derivative loss

Companies challenge jurisdiction

Royal Bank of Scotland Group Plc and Standard & Poor’s were sued in the Netherlands by 16 investors over a debt-linked derivative product that fell in value by as much as 90 percent during the financial crisis.

The class-action lawsuit relates to constant-proportion debt obligations created by RBS’s ABN Amro unit and rated AAA by McGraw Hill Financial Inc.’s S&P, according to Bentham IMF Ltd., the company which is funding the case. The investors are seeking about $250 million.

CPDOs were “among the worst-of-the-worst leveraged synthetic derivatives, causing billions of dollars to be lost by banks and pension funds reliant upon high ratings that had no reasonable basis,” John Walker, executive director of Bentham IMF, said in a statement.

They didn’t identify any of the claimants other than to say they were institutional investors from Germany, Austria and Switzerland. The lawsuit was filed in the District Court of Amsterdam on Dec. 4 by Stichting Ratings Redress, an entity created to manage the class action, Bentham IMF said.

The claim has no merit and the ratings on the securities were assigned in good faith, based on information available at the time, S&P said in an e-mailed statement today.

The ratings company has challenged the jurisdiction of the Netherlands.

Netherlands Presence

“S&P has never had a presence in the Netherlands and its CPDO ratings were assigned in the U.K.,” the company said.

CPDOs, hailed by ABN Amro as a “breakthrough in synthetic credit investments” in a 2006 marketing report, rapidly lost value in the market turmoil that followed the collapse of Lehman Brothers Holdings Inc. in 2008. The companies that created and rated them now face a series of investor lawsuits.

Bentham IMF also funded a claim against ABN and S&P by Australian towns and districts that lost almost everything they invested in the securities. The municipalities won about A$20 million ($18 million) in a trial in Sydney last year when federal court Justice Jayne Jagot said S&P’s ratings were “misleading and deceptive.”

The Australian CPDOs were linked to movements in the iTraxx credit default swap index in Europe and the Dow Jones CDX in the U.S. As credit spreads increased during the global financial crisis, the cash value of the notes was exhausted, according to court filings in Australia.

The rating company has appealed the ruling and a 10-day hearing is scheduled to start in Sydney March 3.

‘No Bearing’

The Australian ruling “has no bearing in this case, as it involves different securities, different facts and different laws,” S&P said.

Entities that control the failed lender WestLB AG sued RBS in the U.K. in September for about 32 million euros ($43 million), saying the Edinburgh-based lender sold CPDOs that were rated with faulty models and were “considerably riskier” than advertised.

$4 Billion

Banks including UBS AG, JPMorgan Chase & Co. and Lehman Brothers sold more than $4 billion of CPDO notes from 2006 to 2007 to investors in six currencies, according to data compiled by CreditSights Inc.

CPDO vehicles sold default insurance linked to company indexes, offering yields as much as twice that of similarly structured finance bonds. Because they borrowed money, losses were amplified when the value of the underlying credit-default swaps fell during 2008 and 2009.

The Dutch lawsuit may increase in size as more investors join the class action, or group lawsuit, according to Steffen Hennig, a partner at Fideres Partners LLP, a London-based distressed-asset consulting firm that is working with Bentham IMF and Netherlands-based law firm BarentsKrans NV on the claim.

“This is a landmark case in many respects,” said Hennig. It’s “the first time that a European court has been asked to take a stand on the responsibility of a rating agency for losses incurred on toxic financial products.”

Bentham IMF, based in Sydney, is a litigation funding company that pays a claimant’s legal fees in return for a share of any damages or compensation.

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