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RBS faces class action on $10bn share offering

US court filing alleges bank misled investors

Royal Bank of Scotland faces a class-action lawsuit in the United States accusing the bank and its directors of misleading investors in its shares just before the credit crisis began.

The suit, filed on Tuesday, alleges that when the bank announced a sale of up to $10bn ($£7bn) of American depository shares (ADS) in June 2007 it failed to disclose the damage suffered by debt securities on its balance sheet.

The bank is also accused of allegedly failing to disclose poor internal controls, the damage that would be done by its acqusition of ABN Amro and the weakness of its capital buffer against the deteriorating sub-prime market.

The legal filing in the US court for the Southern District of New York names Sir Tom McKillop, RBS's chairman, and Sir Fred Goodwin, its ex-chief executive, along with other directors and former executives and its underwriting banks. Sir Fred left the bank at the end of last year and Sir Tom will stand down at April's annual meeting.

The case has been brought by Natalie Gordon, an individual investor. The suit asks for the court to grant class-action status and for the case to be heard by a jury.

When RBS issued the preference shares in question, it was pursuing its disastrous hostile takeover of ABN Amro while defaults on US sub-prime mortgages, which RBS packaged up for sale as investments, soared.

"RBS ultimately annouced multi-billion pound impairment charges associated with its exposure to debt securities, including mortgage-related securities tied to the US real estate markets, causing the price of RBS's ADSs issued in the offering to substantially decline," the lawsuit states.

Stephen Hester, RBS's new chief executive, said last week that RBS had taken on too much debt and that its risks were too concentrated. Flagging up a loss of up to £28bn for 2007, he said that RBS was one of many banks to get carried away in the credit boom.

The lawsuit states that after insisting that its capital position was strong, the bank announced a record £12bn rights issue last April and in October accepted £20bn of capital from the Government. RBS said: "We are aware of this action and similar complaints that have been filed against a number of banks over the past 18 months arising from the turmoil in global financial markets.

"The action will be defended vigorously. It would be inappropriate to comment further at this early stage."

US class actions allow the court to bring all comparable cases under one action. They are controversial because, though they avoid inefficient multiple actions, they can lead to massive payouts such as those made by US cigarette companies in recent years to ill smokers. Antonio Vozzolo, the lawyer acting for Ms Gordon, said: "We would encourage all investors with significant financial losses to come forward and move for lead plaintiff."

RBS ordinary shares in London have fallen from 530p at the end of June 2007 to just 21.3p at yesterday's close.