A FORMER Bank of Scotland senior executive has called for a Financial Services Authority investigation into potentially misleading information put out by the bank's board at the time of its ill-fated £4 billion rights issue last year.

The executive, who is also an HBOS shareholder, told the Sunday Herald he lodged a formal complaint about the bank to both the Treasury and industry watchdog the Financial Services Authority (FSA) last November.

He alleges that the bank's board and other officials, led by the chairman, Lord Dennis Stevenson, and chief executive, Andy Hornby, put a "favourable gloss" on the bank's capital strength, financial position and prospects between March and September last year.

"There is a possibility that we were not told the full truth," said the complainant. "It is possible that they were having difficulties funding the business from the beginning of 2008 then they came out and told us they were a well-capitalised bank."

Under securities law, directors of companies who persuade investors to buy shares in their company through "untrue or misleading statements" could be liable to pay compensation to investors who lose out at a result, as could the companies concerned. That could arise in cases where a board conducted inadequate due diligence or omitted material information when putting a prospectus together.

"If the board is found to have misled the market, it could open the floodgates to hundreds of civil actions against HBOS," said a senior corporate lawyer. "Directors who engage in any behaviour likely to give a user of the market a false or misleading impression as to the price or value of an investment could face unlimited financial penalty."

Last November the FSA confirmed to the complainant it was "reviewing the information very carefully with a view to determining whether it is appropriate to exercise any of our statutory powers in respect of market abuse".

The complainant alleges that the Edinburgh-based bank, which was formally swallowed by Lloyds TSB last week, "failed to give shareholders the complete picture and a favourable gloss was put on some of the financial and trading information".

And he said public statements made by HBOS between March and September last year - including in a rights issue prospectus and verbal statements by board directors - "were unduly optimistic or made without due consideration of the underlying reality".

In particular he said these included "absolute denial of any sort of funding problem in mid-March 2008" after the bank blamed short-sellers for a sudden slide in its share price. In the event, the share issue was only taken up by 8% of HBOS shareholders, forcing underwriters Morgan Stanley and Dresdner Kleinwort to fund £3.8bn themselves.

He also highlighted statements by the bank in a rights issue circular published on 3 June 2008, including "The board is optimistic about the fundamental prospects of the company's core business", and "we are well placed to deliver long-term sustainable growth".

In a rights issue prospectus published on June 19, HBOS said: "The company is of the opinion that, taking into account the net proceeds of the rights issue, the working capital of the group is sufficient for the group's present requirements, that is for at least the 12 months from the date of this prospectus."

Yet HBOS was in need of a rescue offer by Lloyds by mid-September and took an £11.5bn capital injection from the UK government the following month.

In an accompanying trading statement, HBOS said: "We look forward to a stronger second half year. For the year as a whole we expect a resilient performance."

At the meeting at which shareholders were persuaded to vote in favour of the rights issue, in Edinburgh on June 26, the HBOS chairman said: "The rights issue is absolutely right and will put us in a competitive position."

He added: "We are saying performance will be satisfactory and resilient. Armageddon may happen and we should be prepared for it and we are."

And he said: "We are telling the truth; we are truthful people. But if we weren't, there's an army of regulators, auditors etcetera to make sure we are."

Colin McLean, chief executive of Edinburgh-based SVM Asset Management, said: "It's hard to reconcile the comments of Lord Stevenson with what happened to the bank three months later."

The FSA has told the complainant that, owing to strict confidentiality restrictions, it may be unable to update him on its progress. An FSA spokeswoman told the Sunday Herald: "We never confirm or deny that we're investigating a firm, an issue or an individual."

An HBOS spokesman said: "HBOS made a series of detailed disclosures throughout the last year to keep its shareholders informed about the impact the deteriorating economy was having on our business.

"We are completely satisfied that the rigorous processes we had in place ensured that all statements we made provided an accurate picture of HBOS's position."