A Federal Court judge has ruled that investment bank Lehman Brothers is liable for millions of dollars of losses incurred by Australian councils, charities, churches and private investors as a result of failed investments.
The judgment is the first in the world to rule an investment bank liable for its conduct in the lead up to the global financial crisis and its behaviour afterwards, said John Walker, executive director of litigation funder IMF, which helped fund the case.
While Justice Steven Rares ruled on Friday that the bank is liable, he did not make an order on damages and instead will hear submissions on the matter in November.
He also acknowledged that much of the money due to be repaid to investors in the affected products is frozen due to Lehman Brothers' bankruptcy.
A group of 72 councils, charities, churches and private investors sued Lehman Brothers for $248 million, claiming the now-defunct investment bank breached contracts and fiduciary duties, and engaged in misleading and negligent conduct.
Leading the action against Lehman Brothers was Wingecarribee Shire Council, southwest of Sydney, which sought $21.4 million in losses.
They were seeking compensation for losses incurred on investments made on advice from Grange Securities, which was bought by Lehman Brothers Australia in 2007.
The investments also had exposure to the US housing market collapse.
Justice Rares ruled that the investment bank did not make its clients aware of the risks involved with investing in complex financial products known as synthetic collateralised debt obligations (SCDOs).
He said the risks of SCDOs were set out in the issuers' offering documents but Grange did not communicate this to clients because it was making very large profits from the products.
"For these reasons Grange is liable to compensate the councils for their losses incurred as a result of these investments," he said.
Grange was also negligent in recommending the SCDOs to risk averse councils as they did not have a high level of security, were not easily tradeable on a secondary market or easily liquidated for cash, the judgement said.
Justice Rares said for the same reasons Grange engaged in misleading and deceptive conduct when it promoted the SCDOs as suitable investments for councils.
The case had been adjourned for hearing on November 5.