Lloyds Banking Group today said it would launch a robust defence against legal action by investors who are seeking up to £14 billion in compensation following the bank's rescue of ailing rival HBOS.
The taxpayer-backed bank is facing the threat of a mammoth compensation claim after lawyers for investor group Lloyds Action Now wrote to the Treasury, former Lloyds chairman Sir Victor Blank and current chief executive Eric Daniels alleging they were misled over HBOS's finances.
They believe the decision not to include details in the Lloyds takeover prospectus of a £25.4 billion emergency Bank of England loan to HBOS meant that vital information about the bank was withheld.
Lloyds shareholders have lost between £1.50 and £3 per share since the ill-fated HBOS deal and subsequent part-nationalisation of the bank - collectively seeing about £14 billion wiped off the value of their shares.
Lloyds Action Now believes that investors have been left unfairly shouldering the burden of saving HBOS, which should have fallen more fairly on taxpayers in general, according to campaigners.
Lloyds Action Now is launching a nationwide campaign on Wednesday to recruit more of Lloyds's 800,000 shareholders to pursue a potential claim.
It is holding the first in a series of regional meetings in Reading to boost membership from around 500 currently.
Jim Rai, head of litigation at Winckworth Sherwood, which is acting for Lloyds Action Now, said: "There can be no doubt that the fact of the £25.4 billion loan 'of last resort' made by the Bank of England to keep HBOS afloat in October 2008, and before shareholders approved the merger a month later, was a misrepresentation of the facts and contrary to law.
"The loan was not only being kept secret for the possible advantage of the UK banking system, but so that Lloyds TSB shareholders were not put off the proposed acquisition of HBOS."
However, Lloyds disputed the group's claims and said it would "robustly defend the group's position in the event of legal action".
It added: "We provided thorough and appropriate information to shareholders about our liquidity position and that of HBOS, including the general use of Government backed liquidity schemes.
"We disclosed the fact of the support. We disclosed the fact that it was significant. We disclosed the fact that if such support was not available, there would be a material impact on the solvency of the business. That was, in the view of the board, thorough and appropriate disclosure."
The Bank of England only disclosed details of the £25.4 billion loan last November.
It was made at the height of the financial crisis at the time Lloyds investors were being asked to vote on the takeover of HBOS, but was kept secret to prevent further damage to the wider banking system.
The Treasury and other defendants have 90 days to respond to the letter from Lloyds Action Now.
Legal action could prove costly for the activist investors, who have already spent at least £100,000 since the action group was formed a year ago.
Members of Lloyds Action Now pay an upfront fee of £264 and 0.3p plus VAT per share to join the group.
Winckworth said the case could take some 12 to 18 months if it goes to court.