Aggrieved investors are suing Sir Victor Blank and Eric Daniels, the former chairman and chief of Lloyds Banking Group
Lloyds Banking Group's former chief executive, Eric Daniels, and previous chairman, Sir Victor Blank, have been accused of "reckless disregard for the truth" in a class action lawsuit filed in the US by a retired British sea captain.
Lawyers say that shareholders lost an estimated £14bn as Lloyds shares crashed after news of its emergency acquisition of its troubled rival HBOS in 2008. About 1,400 US residents and numerous institutions that bought Lloyds TSB shares on the New York stock exchange could claim compensation.
The case is being fronted by a 79-year-old former merchant navy captain, Albert Ross, who is originally from Scotland and now lives near New Orleans. He and his wife risk losing their home after the family's investment in Lloyds wiped more than $340,000 (£220,000) from their retirement fund.
Ross, a writer of seafaring novels including the self-published Truth, Half Truth and Lies, told reporters: "My wife and I face losing everything we have worked for. It is not just our home but our dignity. We are proud people who have worked hard to maintain our independence only to see everything stripped away from us."
Days after the HBOS acquisition was announced in September 2008, lawyers say that the troubled British bank was "technically insolvent". Because information was kept back, the market did not begin to understand the true nature of its financial woes until February 2009, when a £10bn annual loss was reported.
Announcing the merger, Daniels described it as "a fantastic deal", saying that the combined companies would have a "robust capital position". However, by 1 October, HBOS had been forced to take emergency loans from the Bank of England, which later peaked at £25.4bn, and borrow an estimated $11.5bn from the US Federal Reserve.
During an analyst call on 13 October, Daniels continued to assert that the HBOS acquisition was a "very good deal" for shareholders. Papers filed by lawyers acting for Ross claim the reverse was true: "At that point, HBOS was not only insolvent on a cashflow basis, but on the basis that its assets were substantially exceeded by its liabilities."
Reference is made to a subsequent report by the Bank of England governor, Mervyn King, who said that without the emergency loans, HBOS "would not have survived". The claim is that Blank and Daniels "acted with knowledge of or reckless disregard for the truth in omitting and/or misrepresenting material facts" regarding the bailout, which if true could put them in breach of the US Exchange Act.
"United States securities law is very clear about the heavy consequences of withholding important information which investors are entitled to know when purchasing shares," said Jim Swanson, a partner for the firm bringing the suit.
Lloyds has been listed on the New York stock exchange since 2001, and is bound to report company information in accordance with US market rules. If the Securities and Exchange Commission, the US regulator, pursues its own investigation, it can impose hefty fines. Last year Goldman Sachs paid a record $550m after misleading investors in the marketing of sub-prime mortgages.
Lloyds declined to comment and spokesmen for Blank and Daniels did not respond to requests for comment.