Australia: High standard of care when dealing with unsophisticated investors and public funds

Last Updated: 19 January 2013
Article by Nicole Wearne and Steven Donley

Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) [2012] FCA 1028

The unreported decision of Rares J contains a well reasoned and detailed judgment from His Honour canvassing many current legal topics ranging from representative proceeding process to the duty of financial advisers in negligence, under statute and the imposition of fiduciary duties. This article confines itself to a summary of the facts, the key findings and implications for financial advisers and their insurers arising from the judgment.


Three local councils, Wingecarribee Shire Council (Wingecarribee), Parkes Shire Council (Parkes) and the City of Swan (Swan) sued Lehman Brothers Australia Ltd (in liq), formerly Grange Securities Limited, (Lehman Bros) in the Federal Court of Australia seeking to recover losses sustained by the Councils due to their acquisition, through Lehman Bros, of collateralised debt obligations including synthetic collateralised debt obligations (SCDOs). The councils were representative applicants for 72 Australian investors who lost approximately $250 million on their investments during the GFC.

From 2003, the councils sought advice from Lehman Bros as to the investment of surplus funds. Lehman promoted itself to councils as a financial adviser that understood the investment requirements of local government, including relevant legislative and policy constraints. In late 2000, the New South Wales Minister for Local Government had made an order under the Local Government Act 1993 (NSW) that allowed councils to invest in any securities at all, however exotic, that had been rated "A1" or above by the ratings agencies. Lehman Bros were aware that the councils wished to invest in a conservative and risk averse manner and that the councils' officers were unsophisticated investors. Lehman Bros recommended and sold SCDOs to the councils. Between 2003 and 2007, the councils purchased SCDOs on an ad hoc basis through a series of individual contracts. In 2007, Wingecarribee and Swan entered into Individual Managed Portfolio (IMP) agreements with Lehman Bros, which authorised Lehman Bros to invest council funds in financial products with credit ratings of AA and above and in classes approved by a Ministerial order (which permitted investments in SCDOs).

At the time the SCDOs were issued they had high credit ratings, however returns or losses on the investments were based upon the accuracy of the holder's predictions concerning the occurrence of credit events, being ratings downgrades or defaults on the loans upon which the SCDOs were based. At the time of issue, the SCDOs provided a relatively stable fixed-income return of around 2 percent above the bank interest rates. However, it was known by Lehman Bros that the capital invested could be particularly vulnerable to loss upon the occurrence of major market events. Further, Lehman Bros was the only informed investor transacting in SCDOs on the secondary market, meaning the councils' investment was likely to be illiquid in unfavourable conditions.

As a result of the GFC, many of the SCDOs suffered adverse credit events in 2007. Three of the SCDO investments were completely wiped out, and 11 were frozen by court orders made in international proceedings arising out of the liquidation of the US parent of Lehman Bros.

The councils claimed against Lehman Bros for breach of the ad hoc purchase contracts, breach of the IMP contracts, negligence, breach of fiduciary duty, and misleading and deceptive conduct contrary to section 12DA(1) of the Australian Securities and Investments Commissions Act 2001 (Cth) (ASIC Act). All claims succeeded.

Breach of Contract

The Court found that the ad hoc purchase contracts required Lehman Bros to supply investment products with the following characteristics:

  1. a high level of security for protection of the invested capital;
  2. easily tradeable on an established secondary market;
  3. could be readily liquidated to cash;
  4. appropriate for a public authority with risk-averse investment goals; and
  5. a secure income stream.

The contracts also required Lehman Bros to exercise due care and skill in the provision of investment advice.

The later IMP contracts authorised Lehman Bros to invest its monies subject to the following relevant conditions:

  1. investments were to comply with the councils' investment guidelines requiring risk aversion and capital preservation;
  2. the councils were to have ready access to the funds without penalty;
  3. there must be an active secondary market; and
  4. investment in derivatives was prohibited

The court ruled that Lehman Bros breached the ad hoc contracts and the IMPs by selling SCDOs with the following characteristics:

  1. the high credit ratings falsely represented that the invested capital was secure, when it was vulnerable to the consequences of extreme market conditions;
  2. there was no established secondary market;
  3. the SCDOs were difficult to liquidate; and
  4. the complexities of SCDOs made them unsuitable for unsophisticated and risk-averse investors.

Lehman Bros was also found to have breached its contractual obligations to exercise due care and skill.


His Honour found that Lehman Bros owed a common law duty to the councils to exercise reasonable care in the provision of investment advice. When determining the scope of the duty, the court had regard to the councils' lack of investment sophistication and the fact that public funds were involved. Lehman Bros was found to have breached its duty of care by representing that SCDOs were suitable, given the complexity of the investment, the risks to the invested capital and the lack of liquidity.

Breach of Fiduciary Duty

The court ruled that Lehman Bros owed fiduciary duties to the councils when carrying out ad hoc purchases of SCDOs. Lehman Bros had, when negotiating the SCDO transactions, undertaken to act in the councils' interests when exercising investment powers and discretions. Thus, Lehman Bros was placed under fiduciary duties to refrain from obtaining any unauthorised benefit and to avoid any conflict of interest. The terms of the IMPs attenuated the earlier position somewhat, permitting Lehman Bros to receive fees from the SCDO issuers and to act for both buyer and seller at the same time.

Swan was not using Grange as its exclusive source of financial advice or its sole means of investing its funds.Lehman Bros argued that, consequently, Swan could not have used it as a financial adviser on discrete investment products. His Honour rejected that argument.

"Relationships, and their incidents, depend on what happens, not on preconceived notions such as (Lehman Bros) seemed to assert, that a financial adviser had to be a confidant of its client in respect of every aspect of the client's finances. There is no reason why( Lehman Bros) could not have been an adviser, owing duties, including fiduciary duties, to a council such as Swan, on a single transaction or a number of individual transactions over a period. After all, a family solicitor is ordinarily in a fiduciary relationship with and must advise his or her clients on individual issues, such as the purchase or sale of property, the drawing of a will or their taxation affairs, even though the solicitor may not know about all aspects of the clients' affairs. The facts, not preconceptions, determine what the relationship is and what duties are owed by the professional."1

Lehman Bros was found to have breached its fiduciary duties in three key respects:

  1. by receiving substantial undisclosed fees in connection with the SCDO transactions;
  2. acting in its own interests by earning large profits from every sale and by controlling the secondary market; and
  3. entering into re-purchase agreements with the councils whereby the councils effectively leant funds to Lehman Bros at below market rates.

Misleading and Deceptive Conduct

Lehman Bros' representations regarding the capital risk and suitability of the SCDOs were found to constitute misleading and deceptive conduct contrary to section 12DA(1) of the ASIC Act.


The decision has implications for financial advisers and their insurers. The decision highlights that courts will impose a high standard of care on financial advisers, especially where the management of public funds is concerned or where investors are relatively unsophisticated.

When advising unsophisticated clients, even business or institutional clients, financial advisers must fully disclose risks and assist clients to make good decisions consistent with their own guidelines and policies. The judgment also calls into question the extent to which advisers can rely on the credit ratings assigned to products by ratings agencies.

Finally, financial advisers who are given a discretion to invest on behalf of their clients must be mindful that fiduciary duties will be imposed upon them. The imposition of such a duty requires the adviser to ensure that they provide sufficient disclosure of their interests and obtain fully informed consent from their client to the benefit they might obtain. A general statement that the adviser will receive a benefit is not sufficient. The extent of the fee must be disclosed. The new statutory regime introduced under the Future of Financial Advice (FOFA) package of legislation which took effect from 1 July 2012 is intended to ban conflicted remuneration structures including commissions. However financial advisers and licensees ought to review their adviser agreements to ensure compliance with the new provisions and to make clear their interest where an authority to exercise a discretion to invest is held.


1[2012] FCA 1028 at para 226

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Nicole Wearne
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions