WINGECARRIBEE Council is bringing in the big guns to take on Lehman Brothers after the administrators of the defunct firm forced a poor settlement on the cash-strapped council.
Council has been meeting with litigation funding giant IMF Australia during the past two weeks to negotiate handing over the case to IMF, who will try to force Lehman Brothers into liquidation.
Council lost $29.4 million in Lehman's structured debt products and Mayor Duncan Gair said by handing the case over to IMF there would be a better chance of seeing more than the 10 cents in the dollar offered in the deed of company agreement (DOCA) signed off on by Lehman Brother's creditors on May 28.
Cr Gair said the council could not accept the offer of administrators PPB knowing that Lehman Brothers still had least $236 million in assets.
"They [the administrators] aimed their big guns at us so we are aiming our big guns at them," Cr Gair said at Wednesday night's meeting.
Cr Gair said the final details of the agreement with IMF had not been finalised but an agreement needed to be reached by 9am today because the DOCA was set to be executed by PPB administrators shortly.
Cr Gair would not disclose what percentage of any settlement IMF would take but the longer the case went on the smaller council's share of the pie would be.
The Federal Court will today decide on whether to set aside the DOCA, which was put forward by major creditor Lehman Brothers Asia, on the basis that it unfairly disadvantages councils.
Instead of accepting the DOCA the applicants, the city of Swan and Parkes Councils, want Lehman Brothers wound up.
If Lehman Brothers Australia goes into liquidation, administrators have estimated that it would take up to six years to resolve legal actions brought by local councils, charities and universities that say they were given misleading advice when they invested in the complicated financial instruments.
The council simply did not have the financial reserves to engage in a protracted legal battle with Lehman Brothers, which could go on for years, so signing up with IMF was the smart option, according to the mayor.
IMF will continue to use law firm Piper Alderman, who currently represent 59 creditors (including Wingecarribee Council), and will completely fund the legal battle.
“I don't think we will be worse off by going with IMF. If they are unsuccessful we will be no worse off than we were with the DOCA,” Cr Gair said.
IMF director John Walker said he hoped more creditors would sign up with his firm to bring more force to bear on Lehman Brothers and said IMF only took on cases it thought it had a good chance of winning.
“We will bring in the A-Team to go up against their A-Team,” he said.
“We have investigated the debacle of the CDO market and the dynamics of how they work.”
While IMF's larger financial and professional resources might be a positive turn for council's David and Goliath fight with Lehman Brothers, the community should brace itself for a huge loss at the end of the day.
“It was David versus Goliath but now we will be Goliath. It will be a more even playing field,” Cr Gair said.
“But we are still looking at a loss of something like $20 million.
“We hope that some of the 41 other councils in litigation will join up.”
Council's legal costs over the last 18 months have exceeded $700,000 but under the DOCA council will get 80 per cent of these costs recouped, Cr Gair said.
Councillors Gair, Juliet Arkwright, Graham McLaughlin and possibly Paul Tuddenham will meet with council's independent legal representatives tomorrow morning to rubber stamp the deal with IMF after council delegated them the authority on Wednesday.
Cr Gair said the administrator's treatment of council had been disgraceful and PPB administrators had already taken $4 million in legal cost for itself. He added Lehman Brothers executives would still get as much as $10 million in bonuses.
“They know we are only a little council with shallow pockets,” Cr Gair said.
Cr Arkwright threw her support behind the venture sighting that IMF only take on cases they have a 90 per cent chance of winning.
A total of 308 potential litigation creditors have been identified by administrator Neil Singleton of PPB, with a potential claim value of $625 million - but only 55 litigation creditors, with a claim value of $125 million, have been recognised.
The final settlement may be far from over but Cr Gair admitted there was a clear lesson to be learnt from the Lehman Brothers fiasco.
"Watch out for wolves in sheep's clothing," he said.
- with Marsha Jacobs Australian Financial Review
Email a friend