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Lloyds ‘Mugged’ Shareholders Into 2009 HBOS Deal, Lawyer Says

Updated on
  • Lawyer says U.K.’s then PM vowed to handle antitrust issues
  • Bank of England kept its emergency funding for HBOS secret

Lloyds Banking Group Plc mugged shareholders when it got them to agree to the “catastrophic” HBOS deal at the height of the global financial crisis, a lawyer representing thousands of investors suing the bank said on the first day of a London trial.

Senior executives "pursued a dangerous and value-destroying strategy” to push the deal through, Richard Hill, the claimants’ lawyer, said Wednesday in court. They "withheld or misrepresented" vital information that shareholders never would’ve approved had they know the full extent of the risk.

The case is the second shareholder lawsuit in London courts this year relating to the financial crisis, which forced the U.K. government to pledge 1.2 trillion pounds ($1.6 trillion) to support banks. In June, Royal Bank of Scotland Group Plc reached a last-minute deal with investors as the trial was due to start. Lloyds has consistently stated that the allegations are without any foundation.

HBOS failed in 2008 and was sold to Lloyds, which then required about 20.5 billion pounds of U.K. taxpayers’ money to prevent its collapse. The claimants, which include about 300 pension and investment funds, accuse Lloyds of "secretly" making a 10 billion-pound loan facility available to HBOS and that the bank received billions in "covert" financial support from the Bank of England to keep the bank from collapsing while the deal was being negotiated.

The Bank of England declined to comment on the claimants’ allegations.

The warning signs were clear had the executives done a proper analysis of the risks and impairment rates faced by HBOS, which at the height of the financial crisis was one the U.K.’s worst-performing lenders, Hill said.

‘Catastrophic Impairment’

“HBOS was facing catastrophic impairment,” he said. “Extraordinarily,” the bank’s board didn’t put the risks through “any analysis” and in pressing the deal forward “mugged” shareholders into accepting. “The information that would have disclosed that HBOS was a bust bank” was deliberately withheld, Hill said.

The trial, set to run until the beginning of March, will feature ex-Chief Executive Officer Eric Daniels and former Chairmen Victor Blank as key defense witnesses. Hector Sants, the former head of the U.K. financial regulator, is also expected to testify.

In the weeks leading up to the deal, then-Prime Minister Gordon Brown met Blank at a City of London function and “invited Lloyds to acquire HBOS," Hill said. Brown promised Blank he’d wave any antitrust issues to get the deal through quickly, he said.

“The government was encouraging Lloyds to buy HBOS and to relieve the government of the burden of nationalizing HBOS,” Hill said.

At an extraordinary general meeting on Nov. 19, 2008, a majority of shareholders voted in favor of the deal.

The relatively small number of claimants in the suit is a "good indication of the absence of merit in their claim," Lloyds’ lawyers said in documents prepared for the trial. The bank will open its arguments in the case Thursday.

"The claimants make a large number of serious, but unfounded, allegations," that are "flawed at every level," the bank’s lawyers said.

Bank of England

HBOS got around 25.65 billion pounds in "covert" emergency liquidity from the Bank of England that was kept a secret from the public as well as some $14.5 billion from the U.S. Federal Reserve, the claimants said in documents prepared for trial.

"The Bank of England were determined that it should be kept secret, because it knew that if the market discovered the true extent of the failings of HBOS, it would collapse," Hill said in the documents.

An expert witness for the shareholders estimated the losses for Lloyds from the deal at 9.3 billion pounds, Hill said.

"HBOS had gone from being a functioning bank, to a failed bank; the directors knew it; and they told the Lloyds’ shareholders the opposite," Hill said.

The furor around HBOS has rumbled on elsewhere as other regulators have grappled with the issue. Last month, the U.K. accounting regulator closed its investigation into the conduct of KPMG’s audit of HBOS, saying there’s no “realistic prospect” of finding wrongdoing by the auditor.

Lloyds Chief Executive Officer Antonio Horta-Osorio has strengthened the bank since the financial crisis, restoring the lender’s profitability and financial strength. The CEO has cut thousands of jobs and sold assets, helping him to return the bank to profitability and restore dividend payments in 2015 for the first time since its bailout.

— With assistance by Jill Ward

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