Australian litigation funder launches CDO suit against ABN, S&P in Europe

MELBOURNE Sun Dec 23, 2012 6:54pm EST

MELBOURNE Dec 24 (Reuters) - Litigation funder IMF Australia said it will back lawsuits in Europe related to billions of dollars worth of toxic derivatives created by ABN AMRO Bank N.V. and rated triple-A by Standard and Poor's after winning a similar case in Australia.

IMF Australia said in a statement it had set up a foundation based in The Hague to pursue claims from investors who bought CPDOs, or constant proportion debt obligations - credit derivatives created by the Dutch bank and stamped with S&P's highest rating. ABN AMRO Bank N.V. is now owned by Royal Bank of Scotland.

IMF Australia managing director Hugh McLernon told Fairfax Media the foundation was the equivalent of a class action in the Netherlands.

"We'll proceed with hundreds of millions of dollars, but we are looking for much more than that," McLernon said.

"We've got the funds and we've got the appetite for a fight."

S&P and RBS were not immediately available for comment.

In a landmark judgement issued last month, Australia's Federal court found S&P had deceived 12 local government councils that bought the CPDOs, saying they should never have been given a triple-A rating.

The Australian judgement, which awarded A$30 million ($31 million) in costs and damages to the councils after the notes lost almost all of their value within six months, has been seen as setting a precedent for future litigation around the world.

The Australian case marked the first time a ratings agency had faced trial over the complex financial products widely cited as one of the factors that triggered the global financial crisis.

LITIGATION FUNDING SPOTLIGHT

The case has also shone the spotlight on the rapid growth of litigation finance, which in recent years has sparked a number of start-up investment companies competing to fund large-scale commercial lawsuits in countries including Australia, Britain and the United States.

Litigation funders such as UK-listed Juridica Investments Ltd and Burford Capital Ltd provide financing for lawsuits in exchange for a share of any settlement or judgment, and have been involved in cases against Chevron Corp and Apple Inc among others. If the litigant loses, it does not have to repay the financial investor.

Sydney-based IMF, which made A$8 million from the Australian Federal court case against ABN and S&P, has been credited for pioneering the industry in Australia, where a favourable regulatory environment and a number of high-claim class actions have proved highly profitable in recent years.

IMF made a record net profit of A$43 million from A$71 million of revenue for the 2011-12 financial year, up 88 percent on the previous year, on the back of a successful class action against shopping mall owner Centro Properties.

As an alternative asset class not correlated to market trends or other financial investments like commodities or bonds, litigation financing has been seen as an attractive option for portfolio diversification.

"The current environment is very favourable for litigation funding, which is set to benefit both specifically from an increase in litigation in the aftermath of the global financial crisis and more generally from the growth that is likely to follow as an immature industry continues to expand," Anthony Swan, a portfolio manager at Acorn Capital, IMF's largest shareholder, told Reuters.

IMF opened Bentham Capital in New York last year, looking to tap into the U.S. market where the growth of litigation funders in recent years has alarmed business lobby groups, who have criticised the industry as coercive and disruptive to businesses and called on lawmakers to regulate the industry more tightly.

Bentham Capital had made two funding investments, one less than targeted in its first year of operation.

"We've found a lot of pitfalls in the American litigation system that we weren't aware of until we educated ourselves so the first year has been pretty careful, but it's going in general terms in accordance with our expectation," McLernon told Reuters.

"The one thing we do believe is that litigation funding companies need to have an international operation. National operations will find it difficult to get enough cases in to fund unless they take more and more risks."

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