Case study: John R. Rush as expert witness in financial markets litigation

This account draws upon no confidential legal material. The reporting of Court proceedings draws only upon the public record.

Case study: legal citation

RHG Mortgage Securities Pty Limited & Ors v Elektra Purchase No. 19 Limited [2009] NSWSC 258

This matter was heard before Justice Clifford Einstein in the Supreme Court of New South Wales, in Sydney, Australia in March 2009 and has a judgment date of 8 April 2009. 

Background facts

(This summary deals only with the financial markets aspects of a case that dealt with other complex aspects of law unrelated to financial markets.)

RHG Mortgage Securities (previously known as RAMS Home Loans), part of the publicly listed Australian company RHG Limited, inherited the RAMS mortgage book when the RAMS brand was sold to Westpac Banking Corporation. There were four plaintiffs, all being companies forming part of the RHG group, who will here be referred to collectively as RHG.

Elektra Purchase No. 19 Limited ("Elektra"), the defendant, is a company associated with the German bank Bayerische Hypo-und Vereinsbank (HVB).

Notes to the value of 750 million Australian dollars (AUD) were issued by RHG and sold to HVB pursuant to a Subscription Agreement. HVB transferred its interest in all the Notes to Elektra and also assigned its rights in relation to the Subscription Agreement to Elektra. (Hereinafter the actions of Elektra and other associated entities on the defendant side examined in the litigation will for convenience be taken to be actions of HVB.)

HVB then financed the purchase of the RHG Notes with a series of sales of Euro (EUR) denominated commercial paper (CP). The EUR proceeds thereby obtained were swapped into AUD using a series of cross currency swap transactions that corresponded to each of the series of EUR CP sales. Each swap transaction incurred a cost to HVB.


The purpose of entering into the AUD/EUR swaps was to create a certain (ie in the sense of avoiding all risks arising from movements in the AUD/EUR exchange rate) AUD cost of funds for HVB. Broadly speaking, RHG had agreed to indemnify HVB for any total funding cost derived from the EUR CP sales then swapped into AUD that exceeded what otherwise would have been the comparable AUD cost of funds from similar AUD denominated transactions that were domiciled in Australia.

The crucial words in the legal agreement that were the basis of RHG’s indemnification of HVB were “currency exchange and basis swap costs”. The Court had to decide, inter alia, whether these words had a well-defined meaning and, if so, the implications that meaning had for the calculation of the costs of fully covering the EUR CP proceeds into AUD (and thereby enabling a certain AUD cost of funds to be determined).

Involvement of John R. Rush

Rush was engaged by a leading Australian law firm to act as an expert witness for the defendant, HVB. In a short two week period with several Court-imposed reporting deadlines, he reviewed all the major subject transactions in a series of reports. All pricing of swap transactions was precisely determined in accordance with financial markets practice. In reconstructing the HVB swap transactions, he noted previously undiscovered errors in the HVB swap pricing methodology that were then corrected.

Court proceedings and judgment

Justice Einstein’s judgment in favour of the defendant drew upon John Rush’s expert evidence as presented to the Court in written reports and verbal evidence that was subject to cross examination by the plaintiff’s counsel. The judge accepted:

  • Rush’s view that the six crucial words for indemnification purposes, being “currency exchange and basis swap costs”, have no precise technical meaning (as a composite expression)

  • Rush’s construction of the indemnification costs pursuant to the Rush interpretation of “currency exchange and basis swap costs”
  • the dollar amounts of the “Rush Report” submitted to the Court as being the referrable amounts for indemnification purposes (and rejected the methodological approach of the plaintiff’s expert).

Justice Einstein also noted the defendant’s (HVB) acceptance of Rush’s finding of fault in their calculations and sanctioned Rush’s subsequent corrections.

(The subject matter of the judgment relating to Rush’s contribution is noted in the judgment at paragraphs 132-67.)

Practical financial markets implications of the judgment

When drafting legal agreements purporting to represent financial markets transactions and practice, lawyers need to be cognisant of market practice and the precise meaning (if any) of market terminology. If in doubt as to the actions entailed in any financial markets transactions (particularly complex transactions involving financial derivatives), referral should be made to an expert financial markets practitioner at the document drafting stage so as to minimise the potential for subsequent disagreements over the meaning of financial markets terms included in any agreement.

Parties to complex financial markets transactions (eg cross currency swaps) should understand the market practice that governs the origination and settlement of those transactions. Moreover, parties to the transaction should carefully audit the calculated cash flows of the transactions to ensure correct market rates (particularly exchange rates) have been applied. If in doubt as to the validity of the practice applied or cash flows calculated pursuant to financial markets transactions, referral should be made to an expert independent financial markets practitioner.

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