The news that shareholders of Lloyds Banking Group have launched formal proceedings against Sir Victor Blank and Eric Daniels, its former chairman and chief executive, along with other members of its board of directors to secure compensation for the losses they suffered as a consequence of the bank’s acquisition of HBOS during the financial crises of 2008, could have interesting consequences for private banks and wealth managers.
Will they decide to support it, especially if Lloyds Action Now (LAN), an association of 7,500 shareholders that is prosecuting the case, secures a Group Litigation Order that will enable up to 800,000 private investors as well as institutional investors to have their case heard in the same hearing?
Lloyds shareholders lost around 90 percent of their capital as a consequence of the deal once it the extent of HBOS’ indebtedness became known, says LAN. In addition to being partially nationalised Lloyds shareholders also had to contribute to a rights issue to raise new capital, a move that diluted shareholders’ capital.
More significantly Lloyds Banking Group, which at the time of the HBOS acquisition, had a dividend yield of around 5 percent, and was generally considered to be one of the safest and best capitalised big banking groups in the world, has never paid a dividend yield since.
It is more or less impossible to win a legal action against a director of a UK company unless criminal negligence can be proven.
But LAN may be onto something nonetheless. It claims that Lloyds deliberately withheld important information about the parlous state of HBOS from shareholders when they were asked to approve the takeover of what was then the UK’s biggest mortgage lender.
This, along with misleading statements by directors talking up the deal, led the shareholders as a whole to approve the merger, says LAN. But it claims approval would not have occured if Lloyds had disclosed the full facts about HBOS.
LAN specifically claims that Lloyds kept secret details of £25 billion of Bank of England Emergency Liquidity Assistance (ELA) funding so HBOS could be kept afloat while it mounted its rescue bid.
LAN also claims that had Lloyds declared this funding in the run up to the takeover, as well as a secret loan of $15 billion secured from the US Federal Reserve and a rumoured £10 billion injection from Lloyds itself, HBOS would have gone bust. The deal would never have happened.
Furthermore shareholders suffered a further dilution of their capital as a consequence of two rights issues in 2009. Both these occurred with investors still in ignorance of the ELA and other secret funding. The Bank of England only disclosed the ELA in December 2009, days after the second of these dilutions.
"Sir Victor Blank and Eric Daniels - indeed the financial regulator itself - blithely and repeatedly assured shareholders the takeover of HBOS was a 'wonderful opportunity' and 'a great deal' while knowing all along it was a train wreck,” said Adrian Lithgow, a co-founder of Lloyds Action Now. “They kept this strictly to themselves and a coterie of insiders so they could save the face of the banking community and the government who collectively engineered this disaster. [They were quite happy to see lives ruined in doing so]."
LAN estimates that the HBOS deal lost Lloyds shareholders around £12 billion of value.
But will institutions that held Lloyds Banking Group shares on behalf of clients and customers join the action?
Bar-room lawyers would probably contend that they have a fiduciary duty to secure redress. The problem is, however, that a bar and a court of law are often miles apart. And the law moves at a glacial pace.
The High Court writ, in the name of Lloyds shareholder and LAN member Michael Sharp and 220 other shareholders, is against former directors Sir Victor Blank, Eric Daniels, Timothey Tookey, Helen Weir, Truett Tate and Lloyds Banking Group PLC.
A consortium of Litigation Funders, underwritten by ATE (After The Event) insurance to cover any adverse costs order, is funding the action.
New claimants can join the action free of charge but will be required to pay a percent of any compensation awarded to the funders, says LAN.