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After months of speculation about the possibility of shareholder action against a high street bank, Lloyds TSB is now facing two test cases relating to the bank’s ill-fated takeover of HBOS.
For the last year Winckworth Sherwood has been advising shareholder group Lloyds Action Now (LAN) on bringing action against the bank. Last Friday the firm’s lead litigation partner Jim Rai formerly launched legal proceedings against the bank alleging that former Chancellor Alistair Darling, the Permanent Secretary to the Treasury Sir Nicholas MacPherson and Lloyds TSB directors unlawfully withheld information about the state of HBOS’s finances in a prospectus about the takeover.
The prospectus, it states, failed to disclose a secret £25.4bn loan issued by the Bank of England to HBOS to save it from collapse.
“They were sold a fake Swiss watch,” Rai comments.
The firm is fielding two cases to decide the fate of up to 500 claimants who are funding the claim. The cases will examine the effect on a claimant who sold shares in the bank compared with the effect on a claimant who kept shares.
Winckworth Sherwood is hoping that the Treasury, which oversaw the takeover, will concede liability early on so it can settle cases for claimants who lost between £1.50 and £3 a share.
“We don’t want to get to court,” Rai says. “The last thing we need in today’s climate is a big fight.”
Yet early indications are that Lloyds will fight all the way. In a statement the bank said it intended to launch a robust defence.
The statement said: “We provided thorough and appropriate information to shareholders about our liquidity position and that of HBOS including the general use of Government backed liquidity schemes. We disclosed the fact of the support. We disclosed the fact that it was significant.
“We disclosed the fact that if such support was not available, there would be a material impact on the solvency of the business. That was, in the view of the board, thorough and appropriate disclosure.”
In cases such as these costs become a central point. The LAN members have raised a fighting fund, but Rai is still hoping that the defendants will negotiate a satisfactory outcome without being forced into a position where it settles on unfavourable terms.
“We don’t need to rack up the costs here, we’re happy to sit down and have open discussions,” Rai says, adding that if the bank was to settle it could also pre-emptively settle cases that were likely to come its way from other shareholder groups further down the line.
City banks will be following the case closely as it could signal the beginning of a rush of litigation against high street banks. How Lloyds TSB responds will set the tone for the sector.