Nov. 9 (Bloomberg) -- Lloyds Banking Group Plc’sHBOS unit, which it agreed to buy last year as part of a government- approved takeover, is being investigated by Britain’s financial regulator over disclosures made prior to a 2008 capital raising.

Lloyds, 43 percent government-owned, said in documents last week relating to its own 13.5 billion-pound ($22.7 billion) rights offer, that the Financial Services Authority is looking at HBOS’s offering documents. London-based Lloyds said it was “cooperating fully” with the inquiry.

“The FSA is conducting a supervisory review into the accuracy and completeness of financial disclosures made by HBOS in connection with its capital raisings in 2008, including information as to corporate impairments disclosed in the circulars and/or prospectuses issued by HBOS in connection with such capital raisings,” Lloyds said.

The FSA already investigated “trashing and cashing” of HBOS in March 2008, where speculation about the bank’s finances wiped 17 percent off its share price. The FSA said it found no evidence of market abuse. It also introduced rules in June 2008 to force disclosure of short selling during rights offers, following a slump in Royal Bank of Scotland Group Plc and HBOS, which together needed to raise 14 billion pounds.

A rights offer is a way to raise capital by selling existing shareholders new securities, typically at a discount. Short-selling is when investors borrow shares and sell them in the hope that the price will fall. If it does, they buy back the shares at the cheaper price, return them to their owners and pocket the difference.

Lloyds’s Disclosure

FSA spokeswoman Kirsty Clay declined to comment on any investigation it may be carrying out.

Lloyds said in the documents that it expected increased regulatory scrutiny from antitrust and financial regulators. It already has to sell branches and assets to comply with European Union state-aid rules.

“Regulatory reviews and investigations may result in enforcement actions and public sanction, which could expose the Group to an increased risk of litigation in addition to financial penalties,” the bank said.

Harry Hussain, a spokeswoman for Lloyds, declined to comment further.

The FSA is investigating “conduct, systems and controls” within RBS’s Global Banking and Markets division, the Edinburgh- based bank said in a report last week. The regulator is also probing RBS over its 14.3 billion-euro ($20 billion) takeover of parts of ABN Amro Holding NV, the bank said in August.

Fiona MacRae, a spokeswoman for RBS, declined to comment beyond what was in the report.

To contact the reporters on this story: Caroline Binham in London at cbinham@bloomberg.net

Last Updated: November 9, 2009 09:58 EST