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RBS Faces $6 Billion Investor Action

Royal Bank of Scotland
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Royal Bank of Scotland

A group of shareholders in Royal Bank of Scotland (RBS) has launched a multi-million pound lawsuit against the state-owned bank for misleading investors at the height of the credit crisis in 2008.

In the first court document filed in the U.K. over the bank's record 12 billion pound ($18 billion) cash call in April 2008, a group of 21 claimants - including international investors and pension funds - allege the bank published a defective prospectus littered with misstatements and omissions.

The claim was issued in London's High Court just days before a much larger 4.0 billion pound lawsuit is expected from another investor grouping called the RBoS Shareholders Action Group.

Both claims could lead to RBS's disgraced former CEO Fred Goodwin being forced to appear in court to defend the bank's actions.

"Unless the matter can be resolved amicably, the claimants intend to pursue this litigation vigorously and through to trial in order to seek appropriate redress from the court," said Clive Zietman of U.K. law firm Stewarts Law, who is representing the 21 claimants.

Only broad outlines have been filed so far of a claim Zietman said could be worth "hundreds of millions of pounds".

The RBoS Shareholders Action Group - a group of some 12,000 ordinary shareholders and 100 institutions - has also alleged that RBS misled investors about its financial health at the time of the rights issue and is demanding compensation.

RBS declined comment and its law firm, Herbert Smith, was not available for comment.

The failure of the bank - once a small Scottish retail lender that staged a meteoric rise to global prominence before a spectacular collapse which threatened to fell the entire U.K. financial system - was averted only by a 45 billion pound taxpayer bailout and billions more in state-backed loans.

Goodwin, dubbed "Fred the Shred" for his cost-cutting abilities, was knighted in 2004 for services to banking in an era of "light touch" regulation that celebrated financial innovation under former prime minister Gordon Brown.

But Goodwin's tenure at RBS was brought to an ignominious end after RBS succeeded in its pursuit of ABN AMRO, only to find its Dutch peer's assets overvalued just as the unfolding credit crisis undermined the entire bank sector in late 2007 and 2008.

RBS, already struggling to secure financing for a ballooning leveraged finance and commercial real estate lending business, launched a rights issue, but with its shares in freefall as the liquidity crisis took hold, it was not enough.

In October 2008, with corporate customers withdrawing deposits and RBS hours away from running out of cash, the government took an 83 percent stake and Goodwin became one of the highest-profile failures of the credit crisis.

But he was also one of the best paid, sent home with an annual pension of over 700,000 pounds before a public outcry forced him to slash it to an annual 342,500 pounds.

He was also stripped of his knighthood in early 2012.