Royal Bank of Scotland shareholders who believe they were misled over the bank's notorious 2008 rights issue have just a few more days to join the action group which, unlike many such groups, is promising action.
"We have the money to pay our legal costs," said one of the group's City advisers on a visit to Edinburgh last week. "This is different from other shareholder action groups inasmuch as it is led and managed by shareholders who lost money... shareholders pay a subscription based on a formula which means we are very well funded."
Shareholders with up to 20,000 shares pay a joining fee of £225, and a successful outcome would deliver a 75% refund of the fee and compensation of up to £2 a share.
Already 12,000 private shareholders and some 90 institutions are on board, and the group expects to lodge a writ against the bank and key directors Fred Goodwin, Sir Tom McKillop and Johnny Cameron within weeks. Last week the final obstacle was passed when insurers agreed to support a £20 million bond to underwrite court costs in the event of failure, the adviser said. "Insurers and legal firms have taken their own opinions about our case and they think it's a goer – that gives us confidence."
He said: "Up until now the bank has been somewhat dismissive, but the writ will be issued before Christmas, that's when it starts to get real. The issue is unbelievably simple. At the time of the prospectus, RBS positioned this as a capital strengthening exercise, a prudent course of action. In reality we believe they were technically bust and it was a capital recovery – that is what we have to prove."
The case will hinge on whether or not the bank's directors complied with the Financial Services and Markets Act requirement to be open and honest about the bank's financial position in April 2008, or whether, as the group alleges, the directors "made recklessly optimistic statements which gave a grossly misleading impression of the underlying strength of the bank".
The group's lawyers will be asking to see two critical sets of documents: a record of meetings between the bank and the FSA following the acquisition of ABM Amro at the end of 2007, and the minutes of the RBS board meetings during that period. The group made a request for disclosure of such information a year ago and was declined. It cites a call made by Fred Goodwin to analysts on February 28 in which he reassured that the bank did not need to raise any cash, the injection one day later of $1 2billion into the bank from a secret Federal Reserve fund, and the bank's denial that the lifeline had been needed because the wholesale funding market had dried up.
"If they had positioned the issue as a capital recovery, the price would have been a hell of a lot lower," the adviser said. Shareholders were persuaded to buy in at 220p but within months lost 75% of their investments as the bank was rescued from the brink by a £45bn taxpayer bail-out.
The rights issue prospectus used the end-of-year financial numbers for 2007, a year in which RBS had posted an impressive £8.9bn profit, but it ignored the first few months of ownership of ABN Amro, and the warning signs in the market, the group will claim. In October 2007 analysts studying the Barclays bid for ABN Amro had claimed that RBS risked destroying up to £15bn of value with the merger, while in January 2008 Bear Sterns had gone bust, inevitably impacting the valuation of RBS's investment bank in the US.
"The prospectus talks about historic capital ratios of between 4% and 5%, and the rest of the document talks about strengthening and improvement – giving the impression that the ratio is already above 4%," the adviser said. The group will seek to prove that in reality the core tier 1 ratio did slip below 4%, the regulatory minimum at the time, below which the bank was insolvent, and critically that the directors were aware of it.
"We will argue that at the most critical moment in the bank's financial history they did not update the numbers. As soon as the rights issue was away, profits collapsed."
The shareholders may have an ace up their sleeve when it comes to well-placed witnesses. "A lot of people are prepared to make themselves available," the adviser said. "A lot of staff took out loans to buy the shares and these are not happy people."
The action group, which is suing for £4bn, has incurred the extra expense of suing the directors partly because it believes the bank may settle rather than allow them to give evidence. The loss being claimed is simply the gap between the share price at the rights issue and the price today. The group is being closed to new members next week to enable it to lodge the writ before Christmas.
RBS says it has "substantial and credible legal and factual defences" . It has seen off two suits by US investors alleging defective information about the ABN Amro takeover, though these are subject to appeal.