Monthly Archives: November 2012

John Gapper

Standard and Poor's HQ. Image by Getty

The Australian court judgment against Standard & Poor’s for misleading investors in a complex, structured derivative is a worrying development for rating agencies that face growing legal risks.

The judge found S&P negligent in having accepted a false estimate of volatility given to it by ABN Amro, the issuing bank, and thus assigned the securities a triple-A rating in 2006. In practice, these securities collapsed in value within two years.

As Jayne Jagot, the judge in the case, ruled:

“S&P believed ABN Amro’s assertions that the actual average volatility of the Globoxx since inception was 15 per cent. S&P did not calculate the volatility for itself although it could easily have done so and, in my view, was required to do so as a reasonably competent ratings agency . . . This assumption as to volatility was unreasonably and unjustifiably low.”

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