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 they misled thousands of shareholders into investing £12 billion shortly before its near-collapse.
Letters of claim will be delivered to Mr Goodwin, the bank's former chairman Sir Tom McKillop, its former head of investment banking Johnny Cameron and former finance director Guy Whittaker – along with 15 other former directors – and to the Edinburgh-based institution itself.
The move by the RBS Shareholders' Action Group comes as it prepares for a potential £3bn legal challenge at the High Court in London this summer.
Hundreds of middle-ranking former RBS and NatWest employees are among the 7400 individual investors taking part in the action, which also includes 80 institutions. They claim to have been misled into pumping £12bn into a rights issue – just five months before the Labour Government bailed out RBS with £20bn of taxpayers' money.
The shareholders believe that "misleading statements" and "critical omissions" made by RBS and its former directors – who include former Treasury mandarin Sir Steve Robson – in April and May 2008 gave a deliberately false picture of its financial health.
Mr Goodwin, who was stripped of his knighthood in January, and the other former directors and the bank are alleged to be "jointly and severally liable" for their losses.
The claim is for £2.4bn, but this is expected to rise to at least £3bn as more investors join.
Mr Goodwin and his ex-colleagues have 90 days to contest they were in material breach of the Financial Services and Markets Act 2002 (FSMA), in breaching rules governing prospectus documents and breaking the Financial Services Authority's ( FSA's) Disclosure and Transparency Regulations. Mike Neill, chairman of the action group's directors of claim, said they are proceeding because of "extreme disappointment" with the FSA report in December which criticised Mr Goodwin and his colleagues over the near-collapse.
Mr Neill added: "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. There is now no other route available."
Institutional members include Collins Stewart, Deutsche Bank, SG Hambro, NatWest Stockbrokers and Dutch pensions group MN Services.
The group's core allegation is that the RBS board deliberately misled investors in a 148-page rights issue prospectus published on April 30, 2008. It claims that the bank and its former directors were in breach of the FSMA because of the alleged misrepresentation in this document.
A rights issue occurs when a listed company seeks to strengthen its capital by inviting shareholders to purchase new shares. RBS's was to raise £12bn from investors. 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. In October 2008, RBS received a £20bn taxpayer-funded bailout.
The investor group also alleges that RBS and its former directors presented their acquisition of ABN Amro, which Sir Tom later admitted to be worthless, "in glowing terms" in public statements they made in the period late 2007 to early 2008. From December 2007, two months after the €72bn deal was completed, the Dutch bank was being described at RBS as "a disaster area".
One action group member, a former RBS executive, was part of RBS's Amsterdam-based integration team responsible for relaying such information back to RBS. The individual is preparing a witness statement and is willing to appear in court.
The group alleges that RBS failed to disclose that it had borrowed billions of dollars in emergency funding from the US Federal Reserve. Following a Freedom of Information request it emerged that, without telling shareholders, RBS had borrowed up to $84.5bn in 2008.
Peter de Vink, managing director of Edinburgh Financial and General Holdings, who advises the 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 letters give the bank and its former directors 90 days to confirm whether they believe shareholders are entitled to compensation.
The action group's legal advisers, Bird & Bird and Philip Marshall QC of Serle Court Chambers, declined to comment.
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."