By Ian Fraser
Published: The Herald
Date: 21 May 2014
In an unprecedented clash between two of the UK’s biggest banks, Lloyds Banking Group is suing government owned Royal Bank of Scotland over its “misleading” £12 billion rights issue.
In what is seen as the first American-style class action to hit the English courts Lloyds – which is suing RBS through nine of its pensions and investment management subsidiaries – joins more than 40,000 individual and institutional investors who are already seeking redress from RBS.
A spokesman for Lloyds insurance arm, Scottish Widows, said: “The management in the relevant insurance businesses gave careful consideration as to whether it was in the interests of policyholders to join the legal proceedings and decided it was in their best interests.”
Lloyds’ £420m claim takes the total claim of all investors suing RBS in the High Court of Justice of England and Wales over the rights issue to nearly £5bn.
The claimants allege that in April 2008 the RBS board, led by chairman Sir Tom McKillop and chief executive Fred Goodwin, misled them into pumping billions into the bank’s shares after painting an overly positive picture of the bank’s financial health.
In particular, they allege that RBS failed to disclose the weakness of the bank’s capital position, that its risk management and controls were “fundamentally flawed”, and that ABN was materially overvalued on the RBS books. The claimants also allege RBS was significantly overvaluing its portfolio of credit derivatives and playing down problems it was having with the integration of ABN Amro.
Shares that investors were persuaded to buy for £2 each in June 2008 had fallen to 11p by January 2009, a 94.5% collapse. They are now back up at a rebased 32.7p which means investors are still 83.6% down on their original investment (under former CEO Stephen Hester, RBS conducted a cosmetic 10-for-one share swap).
The numbers of individual litigants suing RBS over the rights issue has surged in recent weeks as a six year deadline approached. A spokesman for the RBoS Shareholder Action Group said that the total number of retail investors who have signed up to its claim has more than doubled from 12,000 in April to in excess of 31,000 today. Of these, the Sunday Herald recently revealed that more than 4,000 are current or former RBS and NatWest staff.
The late surge in investors rushing to join the action means that nearly all the UK’s leading institutional investors and fund management groups are now suing the 81% government owned RBS. Of the top 25 investors in the 2008 rights issue, only five have decided to steer clear of the court case.
These are Barclays, F&C, Fidelity, Norges Bank Investment Management (which manages money for Norway’s £500m sovereign wealth fund), Schroders and State Street Global Advisers.
One set of claimants, the RBoS Shareholders’ Action Group is also suing four past RBS directors – Fred Goodwin, Sir Tom McKillop, Johnny Cameron and Guy Whittaker. Goodwin and several of these other three are expected to be called as witnesses when the case goes to trial but that is not now expected before 2016.
Other groups that are suing RBS over the rights issue include Stewarts Law, which is representing 313 UK and international institutional clients including the Strathclyde Pension Fund, and Quinn Emmanuel Urquhart & Sullivan which is representing five of the UK’s biggest institutional investors – Aviva, Legal & General, Prudential, Standard Life, and Universities Superannuation Scheme. A fourth group represented by law firm Leon Kaye represents 4,200 retail investors with claims worth £22 million.
RBS rejects allegations its former directors misled investors or acted illegally. “These things will be set out in court rather than in an early settlement, we have a good defence on this,” RBS’s chief executive Ross McEwan said at the bank’s first quarter results earlier this month.
The Lloyds entities that have filed papers to sue RBS earlier this week are:- Scottish Widows, Scottish Widows Unit Fund, Pensions Management (SWF), Scottish Widows Unit Trust Managers, Clerical Medical Investments Group, Halifax Life, Clerical Medical Management Fund, HBOS Investment Fund Managers and St Andrews Life Assurance.
A London court hearing in early July will set out the roadmap for the rest of the case, including the timing of a trial.
An edited version of this article was published on page three of The Herald on May 21st, 2014