Trouble continues to brew for the The Royal Bank of Scotland Group (NYSE:RBS) as 91 of the global banking group’s biggest institutional investors join hands to seek legal recourse against its ill-timed £12 billion rights issue in early 2008.  The RBoS Shareholders Action Group, which enlists the muscle of Deutsche Bank (NYSE:DB), HSBC (NYSE:HBC), State Street (NYSE:STT) and Credit Agricole, among others, is in the process of securing between £12 million and £15 million for a contingency fund that will be used in the event they lose their proposed £3.3 billion lawsuit against RBS. The 82% government-owned British group is also being investigated by accounting firm PricewaterhouseCoopers for its recent IT failure incident which left thousands of customers in the lurch.
We maintain a $8.90 price estimate for RBS’s stock, which is about 25% ahead of its current market price. We believe the difference can largely be attributed to the fact that the bank is currently under investigation for its involvement in manipulating LIBOR. Rumors of possible nationalization of the banking group, the impending shareholder lawsuit, and a deteriorating debt situation in the Euro zone are also responsible for the undervaluation to a large extent.
RBS investors have the banking group and its former CEO Fred Goodwin, former chairman Tom McKillop and former investment bank head Johnny Cameron in their cross-hairs over the lawsuit alleging that the bank and its top officials misled them during the rights issue in 2008. 
In the wake of the global economic crisis of 2008, cash-strapped RBS offered to issue 6 billion new shares at a discount of nearly 50% to existing shareholders. Investors lapped up the offering, with 95% of the shareholders subscribing to the new shares which helped the bank quickly raise £12 billion in funds. But, within weeks of the offering, the bank collapsed, and the U.K. government was forced to intervene and bail out the banking group with a significant cash infusion. As a result, the shares were very heavily devalued almost overnight. RBS’ stock is currently trading at nearly a tenth of its value during the 2008 rights issue.
The investors now want RBS and its then top brass to pay up for hiding the precarious condition the bank was in at the time of the rights issue. They allege that there were deliberate omissions in the prospectus aimed at keeping the investors in the dark.
The shareholders group is already a force to reckon with, with 91 institutional investors ready to go to court over the issue, and with an additional 20 waiting to join in once the contingency fund is set up. With RBS potentially liable to lose as much as £3.3 billion ($5.2 billion) if the lawsuit does not go its way, this just adds to the bank’s woes even as it battles to maintain its numbers in these difficult economic conditions.Notes:
- Shareholders look to sue RBS over rights issue – newspaper, Reuters, Sep 3 2012 [↩] [↩]