COURT BATTERS ADVISER DISCLAIMERS

01/02/2013

“Synthetic Collateralised Debt Obligations” – have you glazed over yet?  SCDO’s, as the financial boys call them, are financial products that were sold to a number of councils as, wait for it, “capital secure and liquid”.  When Wingecarribee Shire Council lost a substantial amount of money by investing in them they took action against their adviser, Grange Securities, who had been taken over by Lehman Brothers Australia.  The decision inWingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) (2012) affects all players in the financial advising industry and perhaps even beyond.

Over the coming months our Business Law Brief  will look at a number of aspects of this truly important case – a decision noted around the world that may well have been the catalyst for the recent claim by the US Securities Commission against Standard & Poors for their failure to properly rate SCDO’s, and a number of other exotics.

The judge found that understanding how SCDO’s worked was beyond the grasp of most people and that even he was not sure despite all the evidence and submissions in the lengthy hearing.  He found that SCDO’s were not capital secure or liquid and that in fact the opposite was true.  He found that Grange was guilty of negligence, breach of contract, breach of fiduciary duty and of misleading and deceptive conduct.

Particularly, the court held that the relationship of client and adviser can exist even though there is no written documentation establishing the adviser’s instructions from the client and despite disclaimers in marketing documents put out by the adviser. The relationship between the council and the adviser and the history of that relationship, led the court to find that a relationship existed between the two.  It rejected Grange’s claim that they simply sold products.

Echoing FOS Decision 18959 (the Basis Capital case) the judge found that just because the adviser referred to the formal information memoranda in its promotional materials did not relieve it of the obligation to properly explain the complex transactions and identify in the documents those parts that the client needed to consider in making its decision.  Those references also did not assist the adviser if they misrepresented the situation in other discussions or communication with the client.

Grange’s disclaimers, which said that Grange was not acting as an adviser, were held to be irrelevant because of the relationship the client had with Grange at the time. The judge said it would be ‘commercially absurd’ to say otherwise, because the council acted on the adviser’s recommendations and not on the documents where the disclaimers were situated.

So if you’re a financial adviser send a memo to yourself as follows - quote:

1.   my disclaimer won’t help if it tries to negate the real relationship between me and my client
2.   my disclaimer won’t help if the client doesn’t see it, read it and understand it
3.   my disclaimer won’t help if it is buried in tonnes of paper and no attention is drawn to it
4.   my disclaimer won’t help if I give it to the client after the transaction has occurred.

If you need assistance or have any questions in relation to this article, please contactTOWNSENDS BUSINESS & CORPORATE LAWYERS on (02) 8296 6222.