Recent world events show just how serious and deep the impact of this crisis is. Whilst Australia has so far weathered the problems reasonably well, there has been impact locally and there will no doubt be further impact.
To date we have seen shareholders in Allco Finance Group, Centro Properties Group and MFS Ltd (now Octaviar) institute class actions in an attempt to recover some of their losses as a result of the credit crisis. Each company faces allegations that they failed to disclose crucial information about their debt positions in the period leading up to the credit crisis. The class actions allege that these failures breached continuous disclosure rules in the Corporations Act and constituted misleading and deceptive conduct.
It is reported that as many as 100 local Councils are considering litigation against the Australian subsidiary of Lehman Brothers which sold them Collateralised Debt Obligations ("CDOs") linked to the failed US sub-prime mortgage market. NSW Councils alone are reported to have an estimated $400 million in unrealised losses. Wingecarribee Shire Council is the first to mount a Federal Court action against Lehman Brothers, alleging misleading and deceptive conduct in the management of its investment portfolio. The Council is suing Lehman Brothers over a $70 million investment but the future of that action is now far from clear because of the Lehman Brothers bankruptcy. Charities, churches, hospitals and even nursing homes across Australia are also reported to be caught by the sub-prime-backed CDOs.
There have been few Court decisions dealing with the effects of the US sub-prime crisis to date but insurers may yet see claims emerging through PI and D&O policies. A critical feature of much of the litigation will likely be that the developers and promoters of the CDOs failed to make the investors aware of the risks involved given many of these investments were very high risk. We comment on this below in regard to the recent Basis Capital decision. In addition, directors of distressed companies may face potential exposures given the novel circumstance they face and the difficult decisions that are having to be made. Significant economic events take some time to work their way through the legal system so it will be some time until the full impact on insurers is known.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
