Rate payers contribute to council coffers and the councils then secure this money using various investment bonds or strategies. This money is then spent on capital works and the provision of services expected at a local government level. When the world was spooked by the sub-prime mortgage crisis in the USA, investors worldwide took a long hard look at their portfolios and had to decide whether to sell or hold. Some councils, such as Wingecarribee, Newcastle and Manly Councils in NSW, had investment products they may not have fully understood, that were linked to sub-prime lending. Given differing advice, and with different levels of financial nouse, some sold at a massive loss, while others held and rode out the storm, or most of it.
The devil is always in the detail. As it turns out, a clause in some of the documentation meant some investors in Federation CDO securities (also called “Federation notes”) – were able to recover significant sums, while others could not. Wingecarribee Council was one of the ones that sold theirs – and lost millions. In February 2008, Wingecarribee started a legal case against Lehman Brothers Australia, who offered these complex financial products, the workings of which may not have been fully understood by their purchasers.
But Wingecarribee Council is not the only one to feel it has been misled. Other councils, churches, charities and investors also say they were given bad advice, or deceived, and are seeking damages. At stake are millions of dollars, and behind the action are the thousands of outraged individuals from the communities impacted by the losses.
“Our ratepayers are very angry, our community is very angry,” Former General Manager for Wingecarribee Council, Mr Mike Hyde said.
There are two separate processes underway to address their claims – a class action, which is being funded by IMF (Australia), and an alternative provided by the liquidator of Lehman Brothers Australia, Stephen Parbery. Today a two-day mediation begins for the 72 members of the class action. If mediation fails, Justice Steven Rares will hear a six-week trial, beginning on Monday.