Credit-crunched pension fund compensated

Posted: 24th October 2013

LossesA pension fund that lost more than $30 million as its investments in sophisticated financial products unravelled at the height of the credit crunch has been awarded damages against a bank that acted as its agent and negligently failed to keep it informed of the potential for huge losses as the crisis developed.

During the boom years, the pension fund had, on the bank’s advice, invested heavily in medium term notes that were issued by a company that failed during the 2008 financial crisis. The investments were designed to produce a fixed income but the pension fund’s claimed loss as a result of the debacle came to about $35.5 million, less $1.8 million that it had recovered from the company’s receivers.

The pension fund claimed that the bank was at fault in acquiring and retaining the notes on its behalf and in the way that it had dealt with the situation after doubts regarding the company’s financial standing became apparent. The bank insisted that the notes were considered a good investment at the time; that the pension fund’s losses were the unforeseeable result of the crisis and that its complaints were groundless, having been made with the benefit of hindsight.

Noting that the company had enjoyed an AAA credit rating, the Court accepted that the bank had reasonably acquired the notes which were viewed as appropriate investments at the time. The bank had also been under no duty to dispose of the notes, or to advise the pension fund as to any increase in risk, prior to April 2008, by which time the company’s financial position was perceived to have substantially deteriorated.

Entering judgment in the pension fund’s favour, the Court ruled that, in May 2008, the bank had made negligent and misleading representations to its client as to the increasing risk it faced. Relevant facts which were necessary to give a proper picture were omitted from the bank’s advice and it had not adequately put to the pension fund the option of extricating itself from the investments at that stage.

In the representations it made to the pension fund, the bank had ‘fallen well short of the standards which it rightly set itself’ and the result had been very substantial further losses for its client.  The Court expressed the hope that quantum issues could be agreed between the parties in the light of its decision.