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Business Comment: Terry Murden

RBS compensation comes at a high price

RBoS action groupWhatever the merits of their case, shareholders fighting for compensation against Royal Bank of Scotland have to be admired for their tenacity and patience.

As if matching the firepower that the bank can muster is not a big enough challenge, members of the RBoS Shareholders Action Group, representing some 12,000 small investors, are facing lengthy delays in the case coming to court. Added to that, they have been involved in battles with their own lawyers.

The group is suing the bank as it believes that the lender and its former directors, including former chief executive Fred Goodwin, misled them about the true state of its finances at the time of the bank’s controversial £12 billion rights issue in 2008.

Just months after completing what was then a UK record capital raising, RBS had to go cap in hand to the Government for a £45 billion bailout.

A hearing in the high court in London is now scheduled to begin at the end of next year and a final verdict is not expected until 2018 – ten years after the rights issue took place.

In the meantime, the group was forced to resolve issues with its former legal representatives, Bird & Bird, which last year presented it with a large bill and a demand for prompt payment.

Bird & Bird was heading one of two large claims against RBS, with a team led by its dispute resolution head Steven Baker and Serle Court’s Philip Marshall QC, who continues to act as lead counsel. The firm picked up the mandate as Baker took the RBS case with him when he joined from Olswang in 2012.

The group parted company Bird & Bird in November, citing costs, poor ­communication and difficulties in their relationship. The shareholder group contested the bill and it was reduced by the court authorities. It also appointed Fladgate which has agreed to cap its future legal costs and freed up the cash it needs to pay off its debt to Bird & Bird.

The situation highlights the difficulties faced, and the cost implications involved, in fighting class action battles, particularly complex cases such as this one.  Since coming together in March 2009, small investors in the RBoS Shareholders Action Group have each contributed several hundred pounds to the cause and will be hoping that the long wait, the legal hurdles and the costs involved turn out to be worth the effort.
One expert says that class actions are less easy to fight in Europe than in America where the legal establishment is more experienced and better equipped to fight corporations.
Jeremy Marshall, chief investment officer at Bentham Europe, says investor action has been sporadic at best. “It has often been spearheaded by retail investors who have formed action groups in desperation and attempted to use the legal system to their advantage, often on a misconceived premise,” he says.
“The institutional client base has stayed on the sidelines. As a consequence, with the deck very much stacked against them in terms of firepower, resources and merits, retail actions have floundered and sent out a very mixed message as to the utility of such claims.

“It is erroneously thought that the English group action system is cumbersome and ill-suited to shareholder claims. Although retail actions have gone wrong for various reasons, in truth the nub of the problem has been that the law firms running the actions on behalf of retail investors have not been as well versed in the culture of the claims as their American (and Australian) contemporaries.”

The RBoS action group is suing for £4 billion in compensation. The High Court will hold a case management conference next month, where the judge will review progress and expert ­evidence. The case is scheduled to go to trial in December 2016, but RBS believes it has a strong ­defence against the claims.

Other legal actions include the RBS Rights Issue 
Action Group; law firm Stewarts Law representing 313 institutional investors and pension funds; and an action from leading institutions such as Standard Life.

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