'Investment regret' may creep into the Australian legal system following the outcome of the class action against Lehman Brothers/Grange Securities, according to Sydney law firm King and Wood Mallesons.
Grange was found guilty in the Federal Court in relation to advice and the distribution of synthetic collateralised debt obligations (SCDOs) to 72 Australian councils and charities.
Alexander Morris, partner at King and Wood Mallesons, said the councils claimed a fiduciary relationship existed from the time they began using Grange's services in 2003, although individual managed portfolio (IMP) agreements had not been signed until 2007.
Grange was charged with breach of contract, breach of duty of care, breach of fiduciary duty and deceptive and misleading conduct after the SCDOs lost value during the global financial crisis.
"It's the fiduciary duty that really had fangs, and further, would have been a very good course of action if the misleading and deceptive conduct claims and contract claims hadn't got up as well, because it actually provides a licence for buyer's regret," he said.
Grange tried to argue contributory negligence by the councils, as they had their own investment managers who had a responsibility to read the documentation and disclosures it had provided, Morris said.
But the judge found the councils were reliant on Grange advisers' oral advice and so had no need to read the disclosure statements.
The council's understanding and evidence of its relationship with Grange was deemed more relevant than individual transactions, disclaimers in presentations made to the councils and disclosure documents, he said.
Morris said the court ruled that adviser representations and Grange's marketing material had established unwritten contractual terms that recognised a course of dealing for each transaction, even after the IMP agreements were signed.
"In a sense what his Honour did was say there is an unwritten master agreement lurking behind every contract note…you can't find those terms written anywhere, but it's there and every time you do a contract note, those terms are implied by a master agreement," he said.
Some of the councils experienced total wipeouts of funds invested, but Morris questioned the implications for less extreme cases which could just be investor regret.
"The fiduciary duty, and getting up on the fiduciary duty claim, means you get equitable causation, so it allows, if you're exposed on fiduciary claim, the possibility of someone who just has investment regret.
"It raises the question, 'will there be more investment decision-makers at the institutional end who are willing to go, well we can actually get a bigger return if we have a go at proving reliance?'," Morris said.
Morris said the Grange class action might be the first step in cases involving complex products. It had the potential to expand into other structured products: ratings agency Standard & Poor's was currently in court and had dragged in ABN Amro as the distributor, he said.
Moira Saville, also a partner at King and Wood Mallesons, said that institutional equities class actions were commonplace – although retail investors typically stood behind them.
