Three local councils have won a legal battle against Lehman Brothers over investment losses during the global financial crisis, paving the way for a multimillion-dollar compensation payment.

Federal Court judge Steven Rares last week ruled that Grange Securities, which was bought by Lehman Brothers in 2007 and renamed, is liable to compensate the three councils.

The councils are leading a class action against Lehman Bros Australia involving 72 parties and Justice Rares says his decision resolves issues of fact and law that are relevant to the other claims.

Lehman Australia is in liquidation and earlier this month liquidator PPB Advisory told creditors it has reached a settlement with a syndicate of US insurers that will result in a substantial return.

The liquidator has claims against the US syndicate and another unnamed insurer and PPB says it intends to negotiate further with the other insurer.

He ruled that Grange is liable to compensate the councils for their losses and damages but the parties will have to work through the reasons for the judgement – more than 440 pages long – before the court can make final orders on the amounts.

They return to court on November 14.

For one set of investments Justice Rares ruled the City of Swan in WA lost more than $3 million, Parkes in NSW more than $4.1 million and Wingecarribee in the NSW Southern Highlands $8.8 million.

Other investments remain frozen because of legal action abroad, or they have not matured, and Justice Rares says the parties will have to calculate the councils’ losses based on values he has given.

Grange began recommending synthetic collateralised debt obligations (SCDOs) to the councils in 2003.

The judge describes the debt as “extremely complex” taking “hundreds of close-typed, legally dense pages to document”.

When Grange sold the SCDOs to the councils the products had credit ratings that ranged between AAA, the highest possible, and the ratings of the four major banks. The interest rate was relatively modest but was better than that issued by banks.

Justice Rares says Grange told the councils the investments were suitable for their conservative investment strategies and could be readily redeemed or traded.

But when the global financial crisis hit in 2007 many of the SCDOs suffered “credit events” and three were wiped out, while others were caught in a conflict between judicial decisions in Britain and the US over Lehman Bros US’s bankruptcy, so the funds are frozen.

Grange made “very large profits” from a secondary market to trade the SCDOs but could not continue to operate the market in the economic crisis.

Justice Rares says the SCDOs were not suitable investments for the risk-averse councils and did not have the characteristics they were promised.

He says Grange breached its fiduciary duties as a financial adviser to the councils and engaged in misleading and deceptive conduct when it promoted the SCDOs.

Wingecarribee Shire GM Jason Gordon says the decision is “fantastic” and justifies the council’s doggedness in pursuing the matter.

“The big end of town has taken down the small end of town and is being held accountable,” he told insuranceNEWS.com.au.