Royal Bank of Scotland shareholders and employees who were encouraged by the bank to buy new shares five years ago only to see their value destroyed will lose their right to claim against the bank in 12 months’ time.

That is the warning from the RBoS Shareholders Action Group which has finally lodged its £4 billion claim against four former RBS directors on behalf of 12,000 small investors and 100 large shareholders including local authority pension funds, churches, charities and several major Scottish institutions.

But there is no such prospect ahead for former shareholders in the crashed HBoS, whose mismanagement was yesterday detailed in damning terms for the first time in a parliamentary report.

At HBoS there was no  fundraising prospectus on which to base a claim for misrepresentation, and the heavily criticised directors are unlikely to face legal claims, especially given the six-year time bar in the English courts.

The RBS action group closed its doors to new members three months ago after asking shareholders with fewer than 20,000 shares to pay a joining fee of £350, while a successful outcome would deliver a 75% refund of the fee and compensation of up to £2 a share.

On whether shareholders who did not sign up to the action group could still benefit, a spokesman for the group said : “Probably not. This type of case is often resolved by settlement and only those involved in the action can benefit.”

If it does go to court, however, and assuming the action group wins, further legal claims against the bank would have to be lodged by April 2014 to beat the six-year time bar on bringing an action.

But Bryan Johnston, director at Brewin Dolphin in Edinburgh, warned: “One can readily understand how infuriated shareholders are but the bottom line is they have to prove that the directors of the day actually knew the document was fraudulent.
Incompetence in this  country is not a crime and nor is negligence as a result of it.” 

He added: “Taking a cynical view, the main beneficiaries could be the lawyers.”

More than 63,000 ordinary investors, including 2000 on the bank’s home turf in Edinburgh, bought shares at 200p in the April 2008 fundraising when the bank pled with shareholders for £12bn which it supposedly did not need that badly. 

Within months the shares had plummeted to 30p as the Government rescued the insolvent bank with a £45bn bailout and took a stake of 82%.

HBoS shares were at even higher levels in early 2008, which means surviving holders of Lloyds Banking Group shares who bought in at that time have made losses on a similar scale.

Mr Johnston said the RBoS action “might galvanise shareholders to start pursuing former directors in HBoS”, but there was no comparable document to pin a case on.

It is the second claim to be lodged against RBS in recent days, following a joint claim brought by Dutch bank ING and several pension schemes for misleading investors in the same rights issue.

The action group claims that former directors Fred Goodwin, Tom McKillop, Jonny Cameron and Guy Whittaker “sought to mislead shareholders by misrepresenting the underlying strength of the bank and omitting critical information” from the rights issue prospectus.

They claim that RBS is liable for the losses sustained by investors who participated in the rights issue and lost up to £4bn.

The claimants however have to prove that the directors intentionally made “recklessly optimistic statements which gave a grossly misleading impression” of the bank’s true solvency.

If the case comes to court, the action group’s secret weapon may be current or former RBS employees. 

It has said “a lot of people are prepared to make themselves available.... a lot of staff took out loans to buy the shares and these are not happy people”. The group’s case is that the true purpose of the rights issue was not disclosed.

“Whereas it was inferred as an attempt to improve ratios, the bank was actually strongly advised by the Financial Services Authority to shore up a balance sheet which was critically damaged by the ABN Amro acquisition,” the group says. “RBS portrayed the acquisition as going well in the prospectus, whereas in reality it was not.”

It says RBS did not disclose its capital ratios,which it was obliged to do, failed to make adequate write-downs in relation to ABN Amro, and failed to disclose its reliance on $12bn of loans provided by the US Federal Reserve. 

“In essence, the directors created a false market for RBS shares to raise the £12bn required to shore up the balance sheet,” the group alleges.

The case could hinge on the records of critical meetings between the bank and the  Financial Services Authority following the disastrous  acquisition of ABM Amro at the end of 2007, and on the minutes of the RBS board meetings during that period.

The group will probably have to prove that the bank’s all-important capital ratio was in reality below the regulatory minimum of 4% at the time of the issue, which meant the bank was technically insolvent and the directors were aware of that.
RBS says it has “substantial and credible legal and factual defences”.

Case study

Gordon Muir and his wife Jennifer, from near Leuchars in Fife, had worked a combined 75 years in the NHS and started looking for somewhere to invest retirement cash a decade ago. By 2008 they had amassed more than 22,000 shares in RBS. 

“Originally I looked up the bank on the stock market, it had assets of £1.9 trillion and it was the fifth largest bank by stock market value in the world,” Mr Muir says.

“I said to my wife, ‘we don’t want to be taking a chance here’, and I didn’t want to tie it into a bond for five years as I could take some shares out when we wanted to help the kids or the grandchildren.”  

When the bank offered new shares five years ago at £2, Mr Muir took up his full rights to another 12,000 shares.

He added: “I thought a bank like this has gotto be safe, it couldn’t lose all that money – it beggars belief that they could.”

He says the couple’s total losses in RBS are more than £90,000. “I used to give the kids £3000 a year as a Christmas present, but I have had to stop that, I have never changed my car since 2006, and it affects our holidays now we are retired.”

On joining the action group, he said: “I know this may be good money after bad but people should be doing something about this... lets hope we get somewhere.”