The recent collective settlement of six similar legal cases against the ratings agency S&P (and related cases also involving ANZ and CPG Research and Advisory) run by legal firm Squire Patton Boggs (SPB) on behalf of investors (Coffs Harbour City Council et al, Coffs[1]) provide an interesting comparison between this most recent settlement and one earlier in the year run by Johnson Winter and Slattery (JWS) lawyers (Lifeplan) and an earlier settlement by Piper Alderman (PA) in 2014 (Swan).
The cases were all broadly similar in that S&P assigned various CDO’s “AAA” and “AA” ratings with the various law firms claiming investors purchased the CDO’s relying on these ratings and subsequently sustained losses as the CDO’s defaulted. Lawyers claimed the S&P ratings model and methodologies were flawed and grossly under-estimated the true risks of default and if claimants had know the true risks they would not have invested.
The cases provide a useful comparison as some of the CDO’s were common to all three cases with investors initially reluctant to join the Swan case being persuaded to join group actions against S&P in Coffs and Lifeplan following the successful settlement of Swan in 2014.
The results of these settlements give insights into:
- the benefits or not of using a litigation funder (Swan and Coffs were both funded by a commercial litigation funder whereas Lifeplan was funded in the first instance by the lead applicants);
- which lawyers got the best results; Amanda Banton’s team at PA completed the Swan case before moving to SPB for Coffs whereas Lifeplan engaged JWS separately;
- whether it is best to be in the first of subsequent groups in such actions and;
- whether it is worth taking part in a legal action at all.
All the settlements were subject to various degrees of confidentiality that inhibit transparency on these issues, but in the Coffs settlement which occurred in August 2018, Justice Lee took the view that as much disclosure as possible was in the public interest and he made explicit comparisons with the Lifeplan settlement in his Reasons. Also in the days, weeks and months following the Swan settlement details were published in various public sources that allow comparison of that case to Coffs and Lifeplan.
In Coffs, Justice Lee published the aggregate principal settlement amount in Coffs of $215 million paid by S&P to settle the case. Of this $92 million went to the litigation funder and $20 million in legal fees leaving $102 million for the claimants or only 43% of the total amount paid by S&P. However Justice Lee said this “net amount” when looked at relative to the size of the claim was “not substantially different” from the amounts achieved by claimants in the Lifeplan case, meaning that S&P was willing to pay approximately double the amount relative to the claim size to settle the Coffs case run by SPB relative to the Lifeplan case run by JWS. However because of legal fees and funding charges the end result for claimants in both cases was “roughly similar”[2].
Amicus assesses the result in Swan to also be similar to the Coffs and Lifeplan settlement as it appears as if Claimants there recovered around 30% of their gross principal losses (after payments of legal and funding fees) which combined with recoveries against Lehman Brother Australia (LBA) where recoveries of 70% of principal were anticipated to be achieved at the time would in effect make most investors whole. Amicus arrives at this conclusion as the recoveries in Coffs were around 80% of the principal damages[3], but this is measured after the majority of monies were recovered for most clients from LBA with a likely future dividend payment still to come from LBA which will likely make investors whole.
What we can tentatively conclude from this comparison is:
- It is perhaps better to join these legal actions sooner as the Swan action was less protracted and Claimants received their monies two and a half years earlier at the start of 2016. Amounts able to be claimed against S&P were reduced in the interim due to dividend payments from LBA which reduced the size of the claim amounts.
- SPB were able to recover all their legal and funding costs (and also PA before them) such that their group members do not seem to have been disadvantaged relative to clients of JWS by the fact that SPB’s legal fees were according to Justice Lee “while not the largest sum of costs that has ever been the subject of a s 33V approval, is close to it” and the funding costs were “unprecedentedly large”. In the earlier PA case it was reported the funder made $52 million which was “the highest revenue and return for IMF Bentham [the funder] on a case”[4]
- The basis of claim and the settlement distribution scheme (SDS) decided upon post the settlement are critical factors as JWS opted for an SDS which favoured those clients who had made recoveries from LBA over some that had not[5]. Specific details of the SPB and PA schemes are not known, but it is possible some investors in Lifeplan who were unable to claim against LBA would have been substantially better off had they opted to go with the SPB group in Coffs.
- Despite the largest winners in these legal actions collectively being the lawyers[6] and the funders, those Claimants who elected and were able to claim against both S&P and LBA were broadly made whole on any losses they suffered through the various lawsuits which ultimately is an excellent result for them and one that is substantially better than the small minority who were unable to claim against LBA and S&P and the even smaller minority who elected not to claim against one or both. We can therefore confidently conclude, those claimants who participated in any of these legal actions did substantially better financially than those who did not.
For those investors who would like more details on these settlements or a copy of Justice Lee’s approval of the Coffs settlement (from which much of the information in this article is sourced), please feel free to contact Amicus.
Also, for any investor who has not yet lodged a claim against LBA and suffered losses on LBA issued investments, please feel free to contact us. Amicus is very experienced in the claims lodgement and proof of debt processes and can provide you with free advice on this issue. We would also like to hear from anyone who lost money on any S&P rated CDO and has not previously lodged a claim in respect of that particular CDO or structured product.
[1] The six cases were, Clurname, Coffs, Coffs vs ANZ, MDA National, Mitsub and Liverpool, but for the purposes of brevity we refer to all six cases collectively as “Coffs”. The Coffs case also involved settlement of claims and cross claims between S&P and CPG Research and Advisory and between ANZ and CPG Research and Advisory in relation to CDO’s purchased by Coffs Harbour City Council.
[2] A quote from Justice Lee describing the two settlements in his reasons in the 33V application
[3] $102MM/$132MM
[4] Mark Southwell-Keely a stock market analyst at Select Equities as quoted in the AFR 19 February 2016
[5] JWS initially proposed a settlement distribution scheme based on gross loss meaning those that had already made recoveries from LBA could claim the same loss twice favouring those who had not made recoveries from LBA. Even though this scheme was modified as a result of objectors, many group members who were unable to make recoveries from LBA were still disadvantaged (or discriminated against) as per Justice Lee’s remarks in the Lifeplan 33v Application “apart from differences reflecting differences in quantum that likely could have been claimed by claimants respectively, the SDS otherwise does not discriminate”
[6] JWS legal fees were $5 million, substantially less than SPB, but JWS was handling only one case rather than the six handled by SPB and as per Justice Lees remarks “it was said the Lifeplan proceeding sailed along in the slipstream of the [Coffs] proceedings” and “it was forcefully submitted that the Lifeplan proceeding was only able to be conducted in the way it was because of the work done by [SPB in Coffs]”
