By Ian Fraser
Published: The Herald
Date: 12 March 2012
Unedited version of article published earlier today in The Herald
WARNINGS of legal action will be delivered today to former Royal Bank of Scotland chief executive Fred Goodwin and his ex-boardroom colleagues over allegations that they misled shareholders into investing £12 billion in the bank shortly before its near-collapse.
The RBOS Shareholders Action Group will deliver ‘letters of claim’ to Edinburgh-based Goodwin, who was stripped of his knighthood in January, as well as the bank’s former chairman Sir Tom McKillop, and its former head of investment banking Johnny Cameron and Guy Whittaker, its former finance director and the Gogarburn-based bank itself.
The shareholders believe that RBS and its former directors made “misleading statements” and “critical omissions” in April and May 2008 that gave a false and misleading picture of the bank’s financial health.
They allege that Goodwin, other former board directors and the bank are “jointly and severally liable” for the losses incurred to them. The total value of their claim is £2.4 billion though this is expected to rise to at least £3 billion as more investors join the group.
Mike Neill, chairman of London-based RBOS Shareholders Action Group’s directors of claim, said the group is proceeding because of “extreme disappointment” with the FSA report published in December.
“The reason this group has waited so long since the rights issue is because we had placed great store in the FSA’s report. We had been led to believe this would adjudicate on whether RBS misled investors in early 2008, whether the bank’s 2008 annual report and accounts were accurate, and whether shareholders deserved to be compensated. We waited two years for the FSA to come out but, when it did, we were extremely disappointed. The group believes there is now no other route available to it.”
Neil added that the FSA’s failure to address critical issues in its report triggered an immediate upsurge in investor interest in the group, with large numbers of new members joining in recent months.
The group, which has a large team of advisors including forensic accountants, has spent two years preparing its claim alongside leading London-based commercial law firm Bird & Bird.
Thousands of ordinary investors and hundreds of former RBS and NatWest staff are among the 7,400 individual investors taking part in the action, which also includes 80 institutions. Institutional members include Collins Stewart, Brewin Nominees, Deutsche Bank, SG Hambro, HSBC Global Custody, Northern Bank, NatWest Stockbrokers and Dutch pensions group MN Services.
The core allegation is that the RBS board deliberately misled investors in a 148-page rights issue prospectus published on April 30, 2008. The group alleges that the bank and its former directors were in material breach of the Financial Services & Markets Act 2002 because the document gave a false picture of RBS’s financial health.
A rights issue occurs when a listed company seeks to strengthen its capital by inviting shareholders to purchase new shares, often at a discounted price. RBS’s right issue, which was to raise £12bn from investors, was the largest in UK history at that point. By law, prospectuses issued by companies to accompany such capital-raisings, which can run to hundreds of pages, must be factual and accurately summarize the business’s outlook.
The RBS rights issue prospectus claimed that, once the rights issue was complete, the bank would have sufficient “working capital” to survive unaided for at least another 12 months. However, within five months, the bank was bust and needed a £45.5 billion taxpayer-funded bailout in order to avoid bankruptcy.
The investor group also alleges that RBS and its former directors presented their acquisition of ABN Amro, which McKillop later admitted to be worthless, “in glowing terms” in public statements they made the period late 2007 to early 2008.
From December 2007, two months after the €72bn deal had been completed, the Dutch bank was already being described internally at RBS as “a disaster area” and was known, even by outsiders, to be riddled with worthless toxic derivatives. One member of the action group, a former RBS executive, was part of the Amsterdam-based integration team responsible for relaying information about ABN Amro back to RBS’s Gogarburn headquarters. The former RBS is preparing a witness statement and is among those willing to serve as witnesses in court
The group also alleges that, in the rights issue prospectus, RBS failed to disclose it had secretly borrowed billions of dollars in emergency funding from the US Federal Reserve. Following a Freedom of Information request it emerged last year that, without telling its shareholders or disclosing the information in its rights issue prospectus, RBS had borrowed up to $84.5 billion in secret emergency loans from the Fed between April and October 2008.
Peter de Vink, managing director of Edinburgh Financial & General Holdings, who is among the advisors to the RBOS Shareholders Action Group, said: “If the investors had known about RBS’s extravagant use of the Fed’s secret funding, there’s no way they would have supported the rights issue. The bank’s directors would appear to have been totally duplicitous.”
The group also experienced a surge in support following a January 2011 setback in the US Supreme Court. A US judge granted a separate class action law suit against RBS to a lead plaintiff who did not represent European interests. District judge Deborah Batts later ruled that only investors who had bought RBS shares on US stock exchanges would eligible for class actions against the British-based bank through the US courts. This closed a door for UK local authority pension funds such as North Yorkshire and Merseyside and other institutional investors, many of which subsequently joined or are considering joining the RBoS Shareholder Action Group.
Further to the Woolf Reforms, which encourage the early settlement of disputes, the letters of claim will give Goodwin and the other former RBS directors 90-days to accept they were in material breach of the FSMA, in breach of rules governing prospectus documents and in breach of the FSA’s Disclosure and Transparency Regulations. The letters also give the bank and its former directors 90 days to confirm whether they believe shareholders are entitled to compensation under Section 90 of the FSMA.
The action group’s legal advisers, Bird & Bird and Philip Marshall QC of Serle Court Chambers, declined to comment. Proceedings are expected to be heard in the High Court in the early summer dependent on the response of RBS and its former board.
A spokesman for RBS said: “The group considers that it has substantial and credible legal and factual defences to the remaining and prospective claims and will defend itself vigorously.”
An edited version of this article was the front page splash in The Herald on Monday March 12th 2012. It was published under the headline Thousands launch civil claim against Goodwin. The Herald also ran an excellent leader article (an unsigned op-ed) headlined Directors must be held to account
RBS: Inside The Bank That Ran out of Money, a one hour documentary broadcast on the BBC in October and December 2011, on which I was programme consultant further charts the ways in which Goodwin and his former boardroom colleagues misled their investors. Watch the documentary here. For background on the production read Inside RBS.