Hedge fund SRM leads legal fight over Rock deal
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Friday, 9 May 2008
SRM, the hedge fund that was Northern Rock's biggest shareholder, has joined forces with 150,000 small investors to mount a legal action against the Government over the nationalisation of the stricken bank.
The Monaco-based fund and the UK Shareholders Association have requested a judicial review of the Government's compensation scheme for shareholders, which they argue has been rigged to leave investors with nothing.
They have asked the High Court to investigate the conduct of the Treasury, the Bank of England and the Financial Services Authority in providing lender-of-last-resort backing to Northern Rock in September as well as the period leading up to nationalisation in February.
The litigants will seek to cause maximum discomfort for the authorities by asking for minutes of meetings between the authorities to be made public, as well as the report on Northern Rock produced by Goldman Sachs for the Treasury.
RAB Capital, which built a large stake to become the Rock's second-biggest shareholder, is considering joining the action. Legal & General is expected to join as an interested party next week. A combined action would represent holders of about half the bank's shares.
The shareholders argue that it is unprecedented for a solvent bank to be nationalised after receiving lender-of-last-resort support. They accuse the Government of seizing the bank for commercial gain in a move without parallel in developed markets.
The investors will use evidence from an independent valuer, David Ashton of LECG, to argue that the Government's compensation plan will produce a nil valuation for a company with a book value of £1.75bn.
When Northern Rock was nationalised in February, the Government said it would use an independent valuer to judge what compensation shareholders should receive. But the legislation stipulated the valuation should assume the bank was in administration.
A Treasury spokesman said: "The Treasury's firm view is that the statutory framework for the assessment of compensation, including the assumptions which the valuer will apply, represents a fair and reasonable basis for determining any compensation payable to former shareholders."
