Investors challenge 'unlawful' £50bn Rock bailout

Shareholders in Northern Rock have criticised the Government for encouraging them to keep or buy shares in the stricken bank before nationalising it on terms that will leave them with little or nothing.

Thomas de la Mare, representing small investors the High Court in London yesterday, argued that the Government's harsh terms for nationalisation would have "a devastating effect" on people whose Northern Rock shares were part of their retirement savings.

Dennis Grainger, the lead small shareholder claimant, held on to more than 7,000 shares he had built up in the bank's staff-share scheme, despite the announcement of emergency Bank of England support in September 2007. He was "persuaded" to do so by statements from the authorities that Northern Rock was solvent, well capitalised with a good-quality loan book and that Northern Rock was being supported through short-term funding problems, Mr de la Mare said.

The statements were successful in ending runs on the bank's deposits and shares, and the 150,000 small investors should not face disadvantage for holding on to shares or buying more, Mr de la Mare added. In his evidence, Mr Grainger said: "Many shareholders... still believe they have shares in the bank and have not fully understood what has happened. These are not gamblers."

The shareholders are asking the court to overturn the Government's nationalisation terms, which require a valuer to assume the bank had received no state support and was in administration. The bank's shares were valued at 90p before nationalisation in February; shareholders argue they are really worth at least £3.

The shareholders were supported in court yesterday by Legal & General, the biggest investor in the UK stock market. L&G, which held more than 4 per cent of Northern Rock, said the Government's action meant it could nationalise the whole banking system without compensating shareholders, setting a dangerous precedent.

"Without effective property rights, a free-market economy cannot operate effectively," L&G said. "It is essential for future economic growth and pension security that investors can place their money in the UK stock market, knowing that their shares will not be appropriated for anything less than their fair market value."

The shareholders highlighted the different treatment given to other banks since Northern Rock's nationalisation, with investors in Royal Bank of Scotland and Lloyds Banking Group diluted by Government stakes but not wiped out.