Taking on Wall St: How an Australian CPA beat the Street

In the 10 years since the global financial crisis (GFC), justice for those who lost the most has never been fairly served.

The Wall Street companies that sold the products known as collateralised debt obligations (CDOs), which lost millions for investors the world over and precipitated the GFC, have never had to pay. With one major exception.

One man from Perth, Western Australia, who headed up corporate services at City of Swan in the city’s east, decided he would not – like so many others suffering GFC losses – let Wall Street go quietly.

Forty-nine-year-old Colin Cameron FCPA took on the Wall Street giants and made them pay – dearly.

His decision to take on Lehman Brothers, both in Australia and internationally, as well as ratings agency Standard & Poor’s (S&P) in its New York heartland, has resulted in a substantial win for 92 Australian investors in Lehman Brothers’ AAA-rated CDOs. 

Taking on the financial titans

Cameron can now claim to have got back more than 90 cents on the dollar for the City of Swan and close to the same for many of the other councils and charities that joined in his legal action against these two titans of Wall Street.

In all, he and the 91 other Australian litigants have retrieved more than A$500 million.

The City of Swan lost A$11 million in the aftermath of the GFC; petty cash compared with many others who were sold similar products. Yet it was enough to spur Cameron into action. 

“I was never prepared for local ratepayers to make up the shortfall,” he says.

“I said to my boss, ‘we need to have a real crack at this and when this is done and dusted, be able to put our hands on our hearts and say we chased down every avenue’.”

AAA rated and nearly worthless

Back in July 2007, Cameron had taken up the corporate services post at the City of Swan knowing that it was in a state of financial disrepair.

The value of Lehman Brothers-issued paper – deeply buried within the council’s investment portfolio – was hardly an issue. The council had not given a monthly financial report for three months, the human resources department was in a mess and a quick glance at the Lehman floating note showed it was AAA rated.

“I barely looked at it,” Cameron says. “I thought they were banknotes – there was no mention of CDOs and, even if it had mentioned them, I wouldn’t have known what a CDO was anyway.”

Whatever they were, they were highly rated and came in denominations of A$500,000, with a few valued at A$1 million.

“It looked like we had a diversified portfolio,” he says, “and it said their ratings were better than the state of Western Australia or Australian banks.”

From contagion to meltdown

Cameron soon noticed that one of City of Swan’s Lehman Brothers-issued CDOs, known as Federation, was beginning to tank. Cameron looked more carefully at the investment.

He had been following the US newspapers that had been discussing the subprime mortgage bubble, and some US reports were intimating that the contagion could lead to a financial meltdown.

Australia, meanwhile, was in boom times. Federal treasurer Wayne Swan was telling the Australian people that the inflation genie was out of the bottle. A global meltdown, and a Lehman Brothers default which would render all its paper worthless, still looked and felt impossible.

By March 2008, concerns were for the investment bank Bear Stearns, which resulted in its fire sale to JPMorgan Chase. As the year progressed, the financial institution crisis continued to grow.

Then came the fall of Lehman Brothers itself, the fourth largest investment bank in the world. It had US$700 billion in assets, but only US$25 billion in equity. On 15 September 2008, it filed for Chapter 11 bankruptcy, the largest in US history, triggering the GFC.

A stroke of luck

Far away in east Perth, the local government accountant had a stroke of luck. Cameron had obtained documents and discovered a flip clause in the small print which promised return of all the CDO’s collateral.

“All anybody had relating to the CDO was a term sheet, but I hassled Lehman Brothers Australia and got the full documentation behind the Federation CDO. It turned out I was the only one in the country who had a copy,” he explains. 

“Reading the document was hard going – it was full of double negatives and included eight pages of disclaimers – but the thing that really got me thinking was that this CDO was registered in the Cayman Islands.” 

Cameron knew he was onto something.

Enlisting the help of litigation funder IMF Bentham was a masterstroke. IMF was interested in getting a class action going for Federation and had been talking to 10 councils in 

Western Australia, as well as councils in New South Wales. Initially, IMF had been reluctant to take on City of Swan and the other WA councils Cameron had brought along, but another stroke of luck made it virtually impossible to exclude them.

 

"The actions to recover monies from S&P and Lehman brothers have been 10 years and four court cases in the making."

 

Cameron received a database listing all the Lehman Brothers Australia investors, the amounts and instruments they invested in and how much they paid.

He says Lehman Brothers’ liquidators sent the database to him – he’s not sure why or if it was an error – but that it contained the investment bank’s entire Australian client list. The list was long and related to investments worth A$1.28 billion. 

Class actions and joke offers

Here was a ready-made class action. The same liquidator subsequently tried to sell Cameron and his team a deed of company arrangement that amounted to a paltry two cents to six cents in the dollar for the losses incurred.

Now armed with the knowledge of Lehman Brothers Australia’s full local exposure, Cameron rejected the offer. “It was a joke,” he says.

In all, the actions to recover monies from S&P and Lehman Brothers have been 10 years and four court cases in the making, which, by most reckonings, is fairly slow. 

Cameron teamed with Alan McCormack and Les Finn at the Parkes Shire Council. He was joined by a large number of councils and financially backed by IMF’s then managing director John Walker.

They were ably assisted by the legal team headed by Amanda Banton, originally at Piper Alderman, now at Squire Patton Boggs.

Their first real break came in 2012 when the Federal Court of Australia found Lehman Brothers Australia had engaged in misleading and deceptive conduct, breached fiduciary duties, breached contracts and engaged in negligent conduct. This was the catalyst that helped to spark the action against S&P.

The subsequent case against S&P was based on the investors questioning whether the ratings assigned by the agency were objective, independent and not influenced by any conflicts of interest. It ended with a confidential settlement made by S&P, which remains undisclosed. 

In all, Cameron and his co-litigants took the fight to Lehman Brothers in New York, London and in Australia. Beyond the A$500 million retrieved, some of which came from Lehman Brothers assets held in Australia, there was also a share of insurance proceeds distributed by the liquidator, amounting to more than US$45 million. Cameron’s legal team has been the only one in the world to make a claim in New York.

Losing the lot on a financial bet

While there remains great satisfaction in the final outcome, there is no longer a great deal of residual anger. Yet, Cameron says, what initially spurred him to action was the role of S&P in rating these products.

Taking on S&P simply became his duty. Cameron is the kind of guy who will go to the ends of the earth to ensure the right thing is done. He’s a stickler for detail, letting nothing slip through – and it shows.

“Because I kept hassling people I probably got information I wasn’t supposed to,” he says. 

Cameron reserves his greatest incredulity for some of the new-fangled CDO-type instruments he now sees coming off investment bank lines. Those marketing such products haven’t learned a thing, he says.

“These guys haven’t changed their ways.” 

So why did Cameron persist? Did he truly think from the beginning that he would succeed? 

“Probably arrogance, that I always succeed, that’s one part of it … you keep working hard, it might work. We got the right people, we got the right law firm, and IMF was fantastic.” 

BTOs: the shiny new thing?

When an investment bank calls something an opportunity, offering “leverage, credit enhancement and enhanced returns”, the finance community pays attention.

This claim for bespoke tranche opportunities (BTOs), reportedly from a Goldman Sachs email and cited by finance newswire Bloomberg in early 2015, triggered hot debate across the US.

Bloomberg compared BTOs with collateralised debt obligations (CDOs), the mortgage-backed securities that precipitated the collapse of the US housing market and the global financial crisis. BTOs, or collateralised swap obligations, are backed by single-name credit default swaps, which are customised to investors’ wishes.

Citigroup, in an outlook it published on US credit derivatives, says the deals are “attractive for credit-savvy investors in the post-QE [quantitative easing] credit picker’s market.”

These days there’s a much higher awareness of the risk level involved in these kinds of securities, Robert R. Johnson, president and CEO of the American College of Financial Services told U.S. News.

“The problem then was that these securities were marketed, and rated by the rating agencies, as AAA quality. Then they were purchased by unsophisticated investors who didn’t know what they were buying.” 

Chris Dalton, head of the Australian Securisation Forum, told INTHEBLACK that he could not identify a trend for investing in BTOs.

All the same, Colin Cameron reckons investors need to understand exactly what they’re buying.