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A senior executive from a New South Wales council has told the Federal Court he felt betrayed by the Australian arm of collapsed US investment bank Lehman Brothers because it bought risky products which were affected by the global financial crisis.

Wingecarribee Council invested $30 million in collateralised debt obligations (CDOs) on Lehman’s advice, complex products which exposed investors to sub prime and corporate debt.

It is claiming $21 million in damages as part of a $260 million class action taken by 72 councils, charities and churches against the estate of the failed investment bank.

Lehman Brothers Australia (LBA) denies misleading the councils. It says Wingecarribee authorised the purchase of CDOs by signing an investment agreement.

Lehman Brothers collapsed in September 2008, triggering the global financial crisis.

In a gruelling cross examination by John Sheahan SC, barrister for LBA, Wingecarribee’s financial services manager, Douglas Neville, told the court he had repeatedly told Lehman’s investment advisers the council did not want to invest in CDOs but investments that were capital guaranteed.

He said he felt betrayed when he found out that Lehman had invested in CDOs on behalf of the council.

Mr Sheahan asked Mr Neville why he did not alter the investment agreement between LBA – formerly known as Grange Securities – and Wingecarribee by ruling out the purchase of CDOs in writing.

Mr Neville replied his understanding was that the investment agreement was “generic” and he had received assurances from Lehman staff that Wingecarribee could specify the type of investments it wanted to purchase.

Mr Sheahan grilled Mr Neville on his understanding of financial products and concepts such as CDOs, floating rate notes, and credit ratings.

Mr Neville said he thought CDOs were a type of derivative which were “high risk”.

At times Mr Neville was nervous and appeared confused in his responses to Mr Sheahan’s questions.

Mr Sheahan questioned Mr Neville’s recollection.

“What you have done is cement in your mind a version of the events that does not reflect what actually happened,” Mr Sheahan said.

“No,” replied Mr Neville.

Wingecarribee is in NSW’s Southern Highlands.

If the judge finds against Lehman Brothers Australia, the liquidators for LBA will argue that damages should be paid by credit ratings agency, Standard & Poor’s, which rated the CDOs, and Lehman Brothers Asia.

 

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