By Angela Dorizas

A ruling by the Federal Court has cleared the way for councils to pursue legal action against collapsed US investment bank Lehman Brothers.

The Federal Court found against the validity of a Deed of Company Arrangement (DOCA) put forward by the administrators PPB and Lehman Brothers Asia, which had prevented 38 councils from taking legal action against the former banking giant.

The councils were seeking to recoup losses made from investing in toxic financial instruments, including collateralised debt obligations (CDOs), under misleading advice from Grange Securities, a Lehman Brothers subsidiary.

Parkes Council and Wingecarribee Shire Council from New South Wales, along with the City of Swan from Western Australia, contested the DOCA.

In three seperate judgements, Federal Court judges ruled the arrangement void because it had sought to remove the rights of councils to recover lost investments.

Litigation funder IMF Australia said the DOCA had the effect of preventing councils from “pursuing payment under various insurance policies”.

“IMF will now fund those Councils and other parties in litigation to recover monies lost when they invested in collateralised debt obligations arranged, issued and promoted by those Lehman entities,” IMF said in a statement to the ASX.

Parkes Council general manager, Alan McCormack, said local governments, religious organisations and charities were to receive a dividend of 2c to 13c on their investments, while Lehman Brothers entities were entitled to receive 47c to 100c.

“There is strong conjecture that some Lehman Brothers entities would actually make a profit from the failure of Lehamn Brothers Australia,” McCormack said.

“This Federal Court case was all about an equitable share in the administration of the assets of Lehman Brothers Australia.

“We feel that Lehman Brothers Australia placed us in a vulnerable position and so we were entitled to fair compensation.”