Royal Bank of Scotland, which was fined £325 million this week for its part in the rate-rigging scandal, is facing a fresh legal challenge over the sale of complex financial products.
A group of European investors is seeking up to $250m (£152.9m) in damages after buying the derivatives, called constant proportion debt obligations (CPDOs).
Once described as the “poster child for the excesses of financial engineering”, CPDOs were first issued in 2006 but plunged in value in the run-up to the credit crunch.
State-backed RBS is being sued alongside ratings agency Standard & Poor’s over the sale of the products. The claim is the first group action of its kind to be launched in Europe against an investment bank and ratings agency for their conduct before the financial crisis, litigation finance company Bentham IMF said in a statement to the Australian stock exchange.
Bentham IMF is providing funding for the claim, which has been filed by 16 European institutional investors with a court in Amsterdam. The investors are seeking damages of up to $250m for their losses on the investments, which were rated “AAA” by S&P.
S&P said: “This claim has no merit and we will oppose it vigorously. The ratings on these securities were assigned in good faith based on the information available at the time [2005-6].”
In a 2009 report, the US Federal Reserve described CPDOs as the “poster child for the excesses of financial engineering” and said the highly complex investments were among the first to unravel when the credit markets came under stress in 2007.
RBS has been dragged into the action because the products were sold by ABN Amro, the Dutch banking giant that it acquired in 2007. That deal was followed by a £12 billion rights issue in 2008, just months before the Edinburgh-based group needed a £45bn taxpayer bailout after crashing to record annual losses, and that cash call is also the subject of a number of lawsuits from shareholders.
A spokesman for RBS declined to comment on the CPDO case, which follows a landmark judgment by Australia’s Federal Court in November 2012. Justice Jayne Jagot found S&P had deceived 12 local government councils that bought the products, and in a strongly worded judgment she said the AAA rating given to the investments was “misleading and deceptive”. S&P is appealing against that ruling.
RBS was among a number of global financial institutions that were fined a record €1.7bn by the European Commission on Wednesday for allegedly forming cartels to fix two key benchmark interest rates – Euribor and the yen Libor – used to set the price of trillions of dollars of financial products, from credit cards to mortgages.
Sir Philip Hampton, RBS’ chairman, said the penalty was a “sobering reminder” of its past failings and the lender’s management, led by chief executive Ross McEwan, condemned the behaviour of “a very small number of our employees”.
The fine came just days after McEwan admitted the firm had failed to invest in its systems “for decades” as 750,000 customers found themselves blocked from accessing their own money because of an IT crash on Monday, the year’s busiest day for online shopping.
RBS has also been accused by an adviser to Business Secretary Vince Cable of forcing firms into financial distress to buy their assets at rock-bottom prices.